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Business valuations and market efficiency

Question 10

Working capital

A company expects sales for a new project to be 10,000 units per year. The
sales price in current terms is $25 but will grow at 6% per annum. The project
is expected to last for three years.

Working capital equal to 10% of sales is required to be in place at the beginning
of each year.

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

t0 t1 t2 t3
10000 ×
$25 × $265,000 $280,900
1.06 × 1.06 × 1.06
sales ($) 265,000 280,900 297,754

working capital 10% 26,500 28,090 29,775
cash flow (26,500) (1,590) (1,685) 29,775

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