12-23-2009, 05:39 PM
Dear John,
Please note that there is a conflicting statement in your query. In the first post you have shown $50M per year, in the second, it is $50M in total and after five years change will be 0, do you mean that chances of change is possible in earlier years and there will be no requirement after 5 years? Please clarify.
With regard to your other queries, note that for the purpose of Project evaluation, working capital requirement is taken into account at the time of its investment and its present value is ascertained on the basis of cost of capital (i.e. interest rate at which you evaluate projects) at the predetermined period of projectâs life. In this regard, there should be a fixed time period at which the project is to be evaluated and as to when working capital will be recovered.
Working Capital itself does not indicate any change in the future period, however, while considering other factors, Inflation is most important factor which, if anticipated, should be incorporated into calculation while project is evaluated i.e. future rate of interest will be deflated, but calculation will become tough and time consuming and chances of error will be on the higher side.
In my opinion, you are not going to evaluate the project rather you are more concerned with the preparation of cash budget, In Cash Budget, you should consider outflow of $50M in the year of its requirement, i.e. year 1. So you need to show it as a negative figure in year 1 while preparing your Cash Budget.
I do not expect that you have been satisfied with the aforementioned reply, however, reply is based on the insufficient data which you have provided. Kindly elaborate your data.
Best Regards
Faisal
Please note that there is a conflicting statement in your query. In the first post you have shown $50M per year, in the second, it is $50M in total and after five years change will be 0, do you mean that chances of change is possible in earlier years and there will be no requirement after 5 years? Please clarify.
With regard to your other queries, note that for the purpose of Project evaluation, working capital requirement is taken into account at the time of its investment and its present value is ascertained on the basis of cost of capital (i.e. interest rate at which you evaluate projects) at the predetermined period of projectâs life. In this regard, there should be a fixed time period at which the project is to be evaluated and as to when working capital will be recovered.
Working Capital itself does not indicate any change in the future period, however, while considering other factors, Inflation is most important factor which, if anticipated, should be incorporated into calculation while project is evaluated i.e. future rate of interest will be deflated, but calculation will become tough and time consuming and chances of error will be on the higher side.
In my opinion, you are not going to evaluate the project rather you are more concerned with the preparation of cash budget, In Cash Budget, you should consider outflow of $50M in the year of its requirement, i.e. year 1. So you need to show it as a negative figure in year 1 while preparing your Cash Budget.
I do not expect that you have been satisfied with the aforementioned reply, however, reply is based on the insufficient data which you have provided. Kindly elaborate your data.
Best Regards
Faisal