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CAPITAL INVESTMENT APPRAISAL
Changes in working capital
• Changes in working capital over the projects life are relevant.
Example: Each year: Subtract any increase in
working capital and add any decrease in
working capital.
Working capital levels revert back to their
original levels at the end of a projects life
– therefore an opposite entry must be
made in the last year of the projects life.
• Therefore cash flow in year 1 = 100 000 – 10 000 = 90 000 (sales revenue
less increase in working capital).
• The cash flow in year 2 = 200 000 + 10 000 = 210 000 (sales revenue plus
decrease in working capital).
Debtors that did not pay in year 1 32
will pay in year 2.
