Working Capital Change

[mcjohn]

Hi,

I (mine engineer, not accountant) have been helping put together a cash flow budget for a mine operation that has a projected life greater than 20 years but the project is being evaluated financially on a 20 year plan. I am unsure how to incorporate working capital changes into my spreadsheet despite reading probably 30 google search pages by now on this topic. I have working capital to be equal to assets - liabilities, where my assets are the sum of accounts receivable, spare parts and inventory, and liabilities are accounts payable. Accounts receivable are 4 weeks of sales, spare parts are 1 week of operating costs, accounts payable are 2 weeks of operating costs and coal inventory is 4 weeks of sale (suggested by a contractor but I don't know if that is "correct"). I then include this in my operating activities and after 5 years it is steady at about $50M/year (as in general our long term revenue and operating costs are simply constant projections). The problem is, and I'm no expert on working capital, is that I believe the working capital needs to be recovered? But if the project is evaluated for 20 years but the mine is operating longer, how can I show this working capital has been recovered? Furthermore, even if this wasn't the case, how do you show working capital has been recovered (i.e. do you just put in -$50M at year 20, or spread out or what). And to add to this confusion, does working capital indicate we need to raise this money or..?

John

[mcjohn]

Sorry, I should say the total working capital is about $50M but the change in working capital after 5 years is 0.

[faisal_desperado]

Dear John,

Please note that there is a conflicting statement in your query. In the first post you have shown $50M per year, in the second, it is $50M in total and after five years change will be 0, do you mean that chances of change is possible in earlier years and there will be no requirement after 5 years? Please clarify.

With regard to your other queries, note that for the purpose of Project evaluation, working capital requirement is taken into account at the time of its investment and its present value is ascertained on the basis of cost of capital (i.e. interest rate at which you evaluate projects) at the predetermined period of project’s life. In this regard, there should be a fixed time period at which the project is to be evaluated and as to when working capital will be recovered.

Working Capital itself does not indicate any change in the future period, however, while considering other factors, Inflation is most important factor which, if anticipated, should be incorporated into calculation while project is evaluated i.e. future rate of interest will be deflated, but calculation will become tough and time consuming and chances of error will be on the higher side.

In my opinion, you are not going to evaluate the project rather you are more concerned with the preparation of cash budget, In Cash Budget, you should consider outflow of $50M in the year of its requirement, i.e. year 1. So you need to show it as a negative figure in year 1 while preparing your Cash Budget.

I do not expect that you have been satisfied with the aforementioned reply, however, reply is based on the insufficient data which you have provided. Kindly elaborate your data.

Best Regards

Faisal

[faisal_desperado]

Dear,

I have sent you an email, kindly check the same.

Regards.