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CA Final · Advanced Financial Management · Advanced Capital Budgeting Decisions

Meera Engineering Ltd will start a project needing working capital of Rs 5,00,000 at the start. Working capital requirement will rise to Rs 6,00,000 at the end of Year 1 and stay there until the end of Year 3, when the entire amount is recovered. Ignoring tax, what is the working capital cash flow at the end of Year 3 (inflow positive)?

The working capital cash flow at the end of Year 3 is an inflow of Rs 6,00,000, because the full balance then held is recovered. The Rs 1,00,000 increase in Year 1 is already included in the balance, so the initial Rs 5,00,000 alone is wrong.

  1. ARs 6,00,000Correct
  2. BRs 1,00,000
  3. CRs 5,00,000
  4. DRs 7,00,000

Explanation

At end of Year 3 the entire working capital balance of Rs 6,00,000 is released, giving an inflow of Rs 6,00,000. Option B is the Year 1 increment, a wrong-base error. Option C uses only the initial investment and ignores the later increase.

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