A project is planned to last for three years. Net cash inflows are forecast as £12,000 per year for three years, assumed to arise on the final day of the relevant year. Working capital of £3,000 will be required on the first day of business. The cost of capital is 6 per cent per year. In the calculation shown in Table 12.2 the working capital has to be available at the start of Year 1 (i.e. end of Year 0) but is returned at the end of the project (i.e. end of Year 3).
Table 12.2
Cash flows including working capital requirements
|
End of year |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
|
Cash inflows (£) |
|
12,000 |
12,000 |
12,000 |
|
Working capital (£) |
(3,000) |
|
|
3,000 |
|
Net flows (£) |
(3,000) |
12,000 |
12,000 |
15,000 |
|
Discount factor 5% |
1.000 |
(1 + 0.05) |
(1 + 0.05)2 |
(1 + 0.05)3 |
|
Net flows (£) |
(3,000) |
12,000 |
12,000 |
15,000 |
|
Discount factor |
1.000 |
(1.05) |
(1.1025) |
(1.1576) |
|
Net flows (£) |
(3,000) |
12,000 |
12,000 |
15,000 |
|
Discount factor |
1.000 |
(1.05) |
(1.1025) |
(1.1576) |
|
Discounted net flows (£) |
(3,000) |
11,429 |
10,884 |
12,958 |
|
Present value |
£32,271 |
|
|
|