"If the company goes ahead with the proposed product, it will have an effect on the company’s net operating working capital. At the outset, inventory will increase by Rs.140000 and accounts payable will increase by Rs.40000. The net operating working capital will be recovered after the project is completed." this is a part of calculating NPV question from IAI nov 2006 paper my doubt is why is the working capital deducted at the start of the project and then added back in the end? also why is it shown as a negative in the start of the year?
Hi - I'm not sure what question you are referring to, but NPV should be based on cashflows. Changes in working capital are normally the result of cashflows as the extracts from the question suggest?
I think - Working capital is required from the start of the project so it is a outflow and hence negative i.e. deducted at the start of the project. At the end the working capital is recovered i.e. an inflow and hence added back. However at the end when it is recovered the time value of money comes into play and hence the discounting of that inflow and outflow. Hope your query is resolved.
