In this workout we're gonna examine working capital, operating working capital and we're gonna see what happens when we start getting ready for the project and preempting the need for working capital. And then we're going down and trying to figure out what the cashflow impact of that would be for the project.

You can see that we've been given some income statement amounts and they only start in year four. And that's because in the construction period there is no income statement. We've then given, given the relationship of the income statement and the balance sheet and the relationship is one of days, so this represents 30 days worth of sales outstanding ending up receivables. 20 days worth of inventory of the year of 365 days ending up in inventory, et cetera. We've also been given a build-up and that means that in year three we're gonna get ready and we're gonna build up half of the inventory that we need to start the year. And that makes sense because you need some stuff to sell before you get going. Now the accounts receivable won't start until the operational year. And what we're gonna do is we're gonna say the accounts receivable will be 30 days worth of a year and I'm just gonna hard code the 365 and it will be a representation of 30 days worth of a full year of activity being the sales. And so our prediction would be that we would have 8.2 of accounts receivable at the end of the first year representing the credit sales we've made. Now the inventory, we can do the same thing. We can't just copy down though because it's a little different. Okay. So we might be able to get away with it, but I'm not gonna do it for fear of it going wrong. The day's inventory is 20 days worth of a year times the cost of goods sold. I'd quite like the that to come out as a positive figure. So I'm gonna times that by minus one. And you can see that we've got 2.5 of inventory necessary at the end of the year to maintain those inventory levels that we have represented as days. We're gonna do the same thing for accounts payable. So we've got 25 days worth of the year and that again, will be based on cost of goods sold because that's the best appropriate approximation we have of our purchases. And then again, we'd like that to come out as a positive figure. So we're gonna times it by minus one. Now the operating work in capital, we just gotta be a bit careful here. It will be the accounts receivable plus the inventory, but mitigated by the accounts payable. And this represents the cash tied up. So this is a net asset. Now the cashflow from operating work and capital we can't do yet because what we should do now is we should say that needs to come one to the left. Ooh, there's nothing going on in the construction year or is there? You can see we forgot about the inventory build-up, but we couldn't do it until we had the inventory to build up to anyway. So let's go ahead and do that now. We're gonna do it as a single cell and we're gonna say we're gonna build-up 50% of the necessary inventory. We're gonna build that up in the construction year, have it ready to sell. And that means that overall we need operating working capital of 1.2.

We can now program the cashflow and because it's a net asset, we could do left minus right. And that makes sense because if you see what comes out, we're building up a net asset, we're having to buy it, and that is negative for cashflow. And then what's gonna happen is let's copy that one to the left as well. And that's because really operating working capital was zero. We then had to buy that 50% that cost some money. We then had to top that up to 7.6 that costs some money. And then we could copy that all the way to the right if we wanted to and we could figure out the cash flows in each year.