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Chapter 20

Question 9

Working capital

A company expects sales for a new project to be $20,000 in the first year,
growing at 4% per annum. The project is expected to last for 3 years. Working
capital equal to 15% of annual sales is required and needs to be in place at the
start of each year.

Calculate the working capital cash flows for incorporation into the NPV
calculation.

Time t0 t1 t2 t3
Sales $20,000 $20,800 $21,632
Working capital needed $3,000 $3,120 $3,245 $0

Cash flows $(3,000) $(120) $(125) $3,245

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