I’m working through the 2013 mock and came across a problem that had additional WC needs each year. When asked for the after tax operating cash flow in year 2, I thought I’d need to account for the additional WC that year, but that’s incorrect. If there are additional WC needs each year, do you account for them all up front? Or are they just not considered operating cash flow? Appreciate your help!
Bueller?
I have yet to encounter an incremental WC increase in corp finance. All of the questions deduct at t=0 and add back to the terminal non oper. Copy the question into your response and we’ll all have a look next break.
Thanks! The specific question says: "The 2014 after tax operating cash flow for the new division (in USD millions) is closest to:
a) 0.38
b) 0.57
c) 0.81
Info for the question:
Karen England is a consultant hired by TLGO to expore the feasibility of the new division. England begins by developing future financial projections for the division based on comparable firms that produce similar products. She assumes the capital investment will be made at the end of 2012
Table:
2012 cash flows:
consultant fee: 0.55
capital investment required: 10.36
Annual info (ill do my best to present this in a readable format)
2012 2013 2014
Additional net working capital 2.20 0.62 0.43
Sales 2.70 3.24
Variable expenses 1.62 1.94
Fixed expenses 0.20 0.21
Depreciation 0.21 0.21
EBIT 0.67 0.88
Interest 0.36 0.36
Taxable income 0.31 0.52
Tax expense (32%) 0.10 0.17
Net Income 0.21 0.35
** I thought it would be (Sales - Costs)*(1 - t) + Depr * t - add’l WC needs but the answer choice is C which does not deduct the additional WC. Should account for all WC needs upfront (ie at the end of 2012) and if so, I assume we discount these back to inception of the project? Thanks again!