Maybe I'm over thinking this but there is a question on the CFAI mock exam where there are WC investments through the life of the project not just at initiation. Why would these future year WC investments not be included in the annual cash flows? (See Q49) Thanks for your help.

I think I didn't word the question very well. If you look at the question: #49 of the CFAI practice exam there is working capital invested at the initiation of the project plus additional WC investments each year through the life of the project. I agree with you that the working capital is not returned until the project ends but if you require additional investment throughout the project I would expect these to be included in your annual cash flows (negative value as these are investment costs). Basically the question has a irregular capital investment profile with additional capital invested after initiation of the project. The CFA material (at least the Schwesers material) only really covers regular capital investment profile (invest capital/wc upfront, annual cash flows, terminal CF). I thought they were trying to complicate with an irregular cash flow model with additional investment but I think it was just poorly written.

@tkeenan I know the question you are referring to. It is asking for after tax operating CF (this is in the income statement). Working capital is part of the balance sheet. Yes, agree. Poorly written. There's quite a few of those in the mock.

A CFA Level 2 Discussion About Working Capital Investments Not At Initiation Of Project

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This topic has 6 replies, 3 voices, and was last updated Apr-178:41 pm by MockTurtle.

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- Tkeenan
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  22 Apr 2017 at 8:44 pm
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  Maybe I’m over thinking this but there is a question on the CFAI mock exam where there are WC investments through the life of the project not just at initiation. Why would these future year WC investments not be included in the annual cash flows? (See Q49)
  
  Thanks for your help.
- MockTurtle
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  22 Apr 2017 at 10:53 pm
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  I did the CFAI mock test today (don’t ask me about my score!) and I did not think it was greatly more difficult than the other mock tests I have done. But @Diya is right that there are numerous typos, some of the questions don’t really make sense, and I just now read the answer explanation for a problem and the figures are all wrong!
- Tkeenan
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  23 Apr 2017 at 12:11 am
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  I think I didn’t word the question very well. If you look at the question: #49 of the CFAI practice exam there is working capital invested at the initiation of the project plus additional WC investments each year through the life of the project. I agree with you that the working capital is not returned until the project ends but if you require additional investment throughout the project I would expect these to be included in your annual cash flows (negative value as these are investment costs). Basically the question has a irregular capital investment profile with additional capital invested after initiation of the project. The CFA material (at least the Schwesers material) only really covers regular capital investment profile (invest capital/wc upfront, annual cash flows, terminal CF). I thought they were trying to complicate with an irregular cash flow model with additional investment but I think it was just poorly written.
- Alta12
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  23 Apr 2017 at 12:19 am
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  @tkeenan I know the question you are referring to. It is asking for after tax operating CF (this is in the income statement). Working capital is part of the balance sheet. Yes, agree. Poorly written. There’s quite a few of those in the mock.
- MockTurtle
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  22 Apr 2017 at 10:54 pm
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  Oops, wrong thread! Ignore my comment above. I know which problem you mean, but I haven’t come around to looking at the explanation for the answer yet.
- MockTurtle
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  23 Apr 2017 at 8:41 pm
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  @tkeenan, in the answer explanation they do add in all the yearly working capital amounts to get the terminal year cash flow.
- Alta12
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  23 Apr 2017 at 12:01 am
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  @Tkeenan working capital is only returned at the end of the project therefore does not form part of annual CF. Annual CF = (change in S – change in C) (1-t) x (change in D x t).
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