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1/22/2009 6:33:18 AM

WCM NOTES

Appendix 5 : Treatment of Working Capital

1. Stocks of materials and spares need to be available to facilitate the smooth functioning of a project`s operations. Stocks of final goods may be held before their sale and distribution. Other materials and inputs will be tied up in partially completed production outputs. For some projects, particularly in agroprocessing or industry, such working capital stocks need to be allowed for in the estimates of initial project investments and included in the project statement at financial and economic prices. They are separate from the annual project costs on operations and maintenance.

2. Several types of projects involve negligible working capital. For example, irrigation and road projects require considerable resources for regular operation and maintenance, including labor. However, they require very small amounts of resources tied up and available as materials and spares. Other projects may require stocks of materials but not outputs, for example, power generation from coal that requires coal stocks at power plants but where the product is not storable.

3. In the economic analysis of projects, the value of working capital is calculated at constant prices. If the level of stocks varies over the year, as for many agriculture-based activities, annual average stock levels are used in the calculations. The project statement for economic analysis should contain a cost row showing annual increases in working capital in early project years. The total stocks held as working capital are released at the end of the project and should be shown as a residual value.

4. For agroprocessing and manufacturing investments, and some other projects, working capital may be an important cost for project assessment and financing. Here a full treatment of working capital is required (see paras. 5, 6, 7, and 8 for an example).

5. The components of working capital are

  • initial stocks of materials equivalent to two months requirement for the following year`s production level, valued at shadow prices;
  • final stocks of outputs equivalent to one months sales in the current year, valued at cost in shadow prices; and
  • work in progress based on a production period of 20 days and a working year of 250 days, at the current year`s production level, valued in shadow prices.

6. Basic data has been prepared on annual operating costs at 100 percent capacity utilization (Table 1).

Table 1. Annual Financial and Economic Operating Costs

Components Financial Cost Conversiona Factor Economica Cost
Fixed Costs
Labor - Scarce 100.0 1.000 100.0
Nontraded Materials 50.0 1.000 50.0
Total Fixed Cost 150.0   150.0
Variable Costs
Materials - Traded 200.0 1.260 252.0
Utilities - Nontraded 60.0 1.000 60.0
Labor - Surplus 80.0 0.750 60.0
Total Variable Costs 340.0   372.0
Total Operating Costs 490.0   522.0
a Domestic price numeraire (See Appendix 15)

7. Capacity utilization in this sample processing project builds up over three years at utilization rates of 50, 80, and 100 percent, and then is sustained at maximum capacity. The fixed operating costs include administrative labor and nontradable items for office supplies. The variable operating costs include traded materials with an 11 percent import duty, and negligible handling and transport costs; utility services, which are largely sold at full cost price; and operating labor with an opportunity cost of 75 percent of the annual wage level. A shadow exchange rate factor of 1.4 is applied to the nontax element of traded costs.

8. Table 2 illustrates the calculation of each component of working capital within a project with a one-year construction period and a ten-year operation period, on the basis of the assumptions above. The annual change in working capital is summarized in the bottom row. It is this annual change in working capital and the corresponding residual value that is entered into the project statement for economic analysis of projects.

Table 2. Calculation of Changes in Working Capital (Economic Costs)

Years 0 1 2 3 4 5 6 7 8 9 10
Capacity Utilization      50% 80% 100% 100% 100% 100% 100% 100% 100% 100%
Operating Costs
Fixed 21 150 150 150 150 150 150 150 150 150 150
Variable - Materials 21 126 202 252 252 252 252 252 252 252 252
Variable - Utilities   30 48 60 60 60 60 60 60 60 60
Variable - Labor   30 48 60 60 60 60 60 60 60 60
Total   336 448 522 522 522 522 522 522 522 522
Working Capital
Initial Stocks 21 34 42a 42 42 42 42 42 42 42 0
Change in Initial Stocks   13 8 0 0 0 0 0 0 0 -42
Final Stocks   28 37 44b 44 44 44 44 44 44 0
Change in Final Stocks   28 9 6 0 0 0 0 0 0 -44
Work in Progress   12 20 25c 25 25 25 25 25 25 0
Change in Work in Progress   12 7 5 0 0 0 0 0 0 -25
Change in Working Capital 53 25 11 0 0 0 0 0 0 0 -110

a Two months` worth of materials: 252 x 2/12 = 42.

b One months worth of sales at cost: 522 x 2/12 = 44.

a Value of materials for the production period, plus half the additional value of other variable costs added during processing for the production period: [252 + 0.5 (522-252-150] x 20/250 = 25.


Posted by Sunil Samdani | comments

1/22/2009 6:33:03 AM

WCM NOTES

Treatment of Working Capital

1. Stocks of materials and spares need to be available to facilitate the smooth functioning of a project`s operations. Stocks of final goods may be held before their sale and distribution. Other materials and inputs will be tied up in partially completed production outputs. For some projects, particularly in agroprocessing or industry, such working capital stocks need to be allowed for in the estimates of initial project investments and included in the project statement at financial and economic prices. They are separate from the annual project costs on operations and maintenance.

2. Several types of projects involve negligible working capital. For example, irrigation and road projects require considerable resources for regular operation and maintenance, including labor. However, they require very small amounts of resources tied up and available as materials and spares. Other projects may require stocks of materials but not outputs, for example, power generation from coal that requires coal stocks at power plants but where the product is not storable.

3. In the economic analysis of projects, the value of working capital is calculated at constant prices. If the level of stocks varies over the year, as for many agriculture-based activities, annual average stock levels are used in the calculations. The project statement for economic analysis should contain a cost row showing annual increases in working capital in early project years. The total stocks held as working capital are released at the end of the project and should be shown as a residual value.

4. For agroprocessing and manufacturing investments, and some other projects, working capital may be an important cost for project assessment and financing. Here a full treatment of working capital is required (see paras. 5, 6, 7, and 8 for an example).

5. The components of working capital are

  • initial stocks of materials equivalent to two months requirement for the following year`s production level, valued at shadow prices;
  • final stocks of outputs equivalent to one months sales in the current year, valued at cost in shadow prices; and
  • work in progress based on a production period of 20 days and a working year of 250 days, at the current year`s production level, valued in shadow prices.

6. Basic data has been prepared on annual operating costs at 100 percent capacity utilization (Table 1).

Table 1. Annual Financial and Economic Operating Costs

Components Financial Cost Conversiona Factor Economica Cost
Fixed Costs
Labor - Scarce 100.0 1.000 100.0
Nontraded Materials 50.0 1.000 50.0
Total Fixed Cost 150.0   150.0
Variable Costs
Materials - Traded 200.0 1.260 252.0
Utilities - Nontraded 60.0 1.000 60.0
Labor - Surplus 80.0 0.750 60.0
Total Variable Costs 340.0   372.0
Total Operating Costs 490.0   522.0
a Domestic price numeraire (See Appendix 15)

7. Capacity utilization in this sample processing project builds up over three years at utilization rates of 50, 80, and 100 percent, and then is sustained at maximum capacity. The fixed operating costs include administrative labor and nontradable items for office supplies. The variable operating costs include traded materials with an 11 percent import duty, and negligible handling and transport costs; utility services, which are largely sold at full cost price; and operating labor with an opportunity cost of 75 percent of the annual wage level. A shadow exchange rate factor of 1.4 is applied to the nontax element of traded costs.

8. Table 2 illustrates the calculation of each component of working capital within a project with a one-year construction period and a ten-year operation period, on the basis of the assumptions above. The annual change in working capital is summarized in the bottom row. It is this annual change in working capital and the corresponding residual value that is entered into the project statement for economic analysis of projects.

Table 2. Calculation of Changes in Working Capital (Economic Costs)

Years 0 1 2 3 4 5 6 7 8 9 10
Capacity Utilization      50% 80% 100% 100% 100% 100% 100% 100% 100% 100%
Operating Costs
Fixed 21 150 150 150 150 150 150 150 150 150 150
Variable - Materials 21 126 202 252 252 252 252 252 252 252 252
Variable - Utilities   30 48 60 60 60 60 60 60 60 60
Variable - Labor   30 48 60 60 60 60 60 60 60 60
Total   336 448 522 522 522 522 522 522 522 522
Working Capital
Initial Stocks 21 34 42a 42 42 42 42 42 42 42 0
Change in Initial Stocks   13 8 0 0 0 0 0 0 0 -42
Final Stocks   28 37 44b 44 44 44 44 44 44 0
Change in Final Stocks   28 9 6 0 0 0 0 0 0 -44
Work in Progress   12 20 25c 25 25 25 25 25 25 0
Change in Work in Progress   12 7 5 0 0 0 0 0 0 -25
Change in Working Capital 53 25 11 0 0 0 0 0 0 0 -110

a Two months` worth of materials: 252 x 2/12 = 42.

b One months worth of sales at cost: 522 x 2/12 = 44.

a Value of materials for the production period, plus half the additional value of other variable costs added during processing for the production period: [252 + 0.5 (522-252-150] x 20/250 = 25.


Appendix 5 : Treatment of Working Capital

1. Stocks of materials and spares need to be available to facilitate the smooth functioning of a project`s operations. Stocks of final goods may be held before their sale and distribution. Other materials and inputs will be tied up in partially completed production outputs. For some projects, particularly in agroprocessing or industry, such working capital stocks need to be allowed for in the estimates of initial project investments and included in the project statement at financial and economic prices. They are separate from the annual project costs on operations and maintenance.

2. Several types of projects involve negligible working capital. For example, irrigation and road projects require considerable resources for regular operation and maintenance, including labor. However, they require very small amounts of resources tied up and available as materials and spares. Other projects may require stocks of materials but not outputs, for example, power generation from coal that requires coal stocks at power plants but where the product is not storable.

3. In the economic analysis of projects, the value of working capital is calculated at constant prices. If the level of stocks varies over the year, as for many agriculture-based activities, annual average stock levels are used in the calculations. The project statement for economic analysis should contain a cost row showing annual increases in working capital in early project years. The total stocks held as working capital are released at the end of the project and should be shown as a residual value.

4. For agroprocessing and manufacturing investments, and some other projects, working capital may be an important cost for project assessment and financing. Here a full treatment of working capital is required (see paras. 5, 6, 7, and 8 for an example).

5. The components of working capital are

  • initial stocks of materials equivalent to two months requirement for the following year`s production level, valued at shadow prices;
  • final stocks of outputs equivalent to one months sales in the current year, valued at cost in shadow prices; and
  • work in progress based on a production period of 20 days and a working year of 250 days, at the current year`s production level, valued in shadow prices.

6. Basic data has been prepared on annual operating costs at 100 percent capacity utilization (Table 1).

Table 1. Annual Financial and Economic Operating Costs

Components Financial Cost Conversiona Factor Economica Cost
Fixed Costs
Labor - Scarce 100.0 1.000 100.0
Nontraded Materials 50.0 1.000 50.0
Total Fixed Cost 150.0   150.0
Variable Costs
Materials - Traded 200.0 1.260 252.0
Utilities - Nontraded 60.0 1.000 60.0
Labor - Surplus 80.0 0.750 60.0
Total Variable Costs 340.0   372.0
Total Operating Costs 490.0   522.0
a Domestic price numeraire (See Appendix 15)

7. Capacity utilization in this sample processing project builds up over three years at utilization rates of 50, 80, and 100 percent, and then is sustained at maximum capacity. The fixed operating costs include administrative labor and nontradable items for office supplies. The variable operating costs include traded materials with an 11 percent import duty, and negligible handling and transport costs; utility services, which are largely sold at full cost price; and operating labor with an opportunity cost of 75 percent of the annual wage level. A shadow exchange rate factor of 1.4 is applied to the nontax element of traded costs.

8. Table 2 illustrates the calculation of each component of working capital within a project with a one-year construction period and a ten-year operation period, on the basis of the assumptions above. The annual change in working capital is summarized in the bottom row. It is this annual change in working capital and the corresponding residual value that is entered into the project statement for economic analysis of projects.

Table 2. Calculation of Changes in Working Capital (Economic Costs)

Years 0 1 2 3 4 5 6 7 8 9 10
Capacity Utilization      50% 80% 100% 100% 100% 100% 100% 100% 100% 100%
Operating Costs
Fixed 21 150 150 150 150 150 150 150 150 150 150
Variable - Materials 21 126 202 252 252 252 252 252 252 252 252
Variable - Utilities   30 48 60 60 60 60 60 60 60 60
Variable - Labor   30 48 60 60 60 60 60 60 60 60
Total   336 448 522 522 522 522 522 522 522 522
Working Capital
Initial Stocks 21 34 42a 42 42 42 42 42 42 42 0
Change in Initial Stocks   13 8 0 0 0 0 0 0 0 -42
Final Stocks   28 37 44b 44 44 44 44 44 44 0
Change in Final Stocks   28 9 6 0 0 0 0 0 0 -44
Work in Progress   12 20 25c 25 25 25 25 25 25 0
Change in Work in Progress   12 7 5 0 0 0 0 0 0 -25
Change in Working Capital 53 25 11 0 0 0 0 0 0 0 -110

a Two months` worth of materials: 252 x 2/12 = 42.

b One months worth of sales at cost: 522 x 2/12 = 44.

a Value of materials for the production period, plus half the additional value of other variable costs added during processing for the production period: [252 + 0.5 (522-252-150] x 20/250 = 25.


Posted by Sunil Samdani | comments

1/22/2009 6:32:53 AM

MERGER STAT

Treatment of Working Capital

1. Stocks of materials and spares need to be available to facilitate the smooth functioning of a project`s operations. Stocks of final goods may be held before their sale and distribution. Other materials and inputs will be tied up in partially completed production outputs. For some projects, particularly in agroprocessing or industry, such working capital stocks need to be allowed for in the estimates of initial project investments and included in the project statement at financial and economic prices. They are separate from the annual project costs on operations and maintenance.

2. Several types of projects involve negligible working capital. For example, irrigation and road projects require considerable resources for regular operation and maintenance, including labor. However, they require very small amounts of resources tied up and available as materials and spares. Other projects may require stocks of materials but not outputs, for example, power generation from coal that requires coal stocks at power plants but where the product is not storable.

3. In the economic analysis of projects, the value of working capital is calculated at constant prices. If the level of stocks varies over the year, as for many agriculture-based activities, annual average stock levels are used in the calculations. The project statement for economic analysis should contain a cost row showing annual increases in working capital in early project years. The total stocks held as working capital are released at the end of the project and should be shown as a residual value.

4. For agroprocessing and manufacturing investments, and some other projects, working capital may be an important cost for project assessment and financing. Here a full treatment of working capital is required (see paras. 5, 6, 7, and 8 for an example).

5. The components of working capital are

  • initial stocks of materials equivalent to two months requirement for the following year`s production level, valued at shadow prices;
  • final stocks of outputs equivalent to one months sales in the current year, valued at cost in shadow prices; and
  • work in progress based on a production period of 20 days and a working year of 250 days, at the current year`s production level, valued in shadow prices.

6. Basic data has been prepared on annual operating costs at 100 percent capacity utilization (Table 1).

Table 1. Annual Financial and Economic Operating Costs

Components Financial Cost Conversiona Factor Economica Cost
Fixed Costs
Labor - Scarce 100.0 1.000 100.0
Nontraded Materials 50.0 1.000 50.0
Total Fixed Cost 150.0   150.0
Variable Costs
Materials - Traded 200.0 1.260 252.0
Utilities - Nontraded 60.0 1.000 60.0
Labor - Surplus 80.0 0.750 60.0
Total Variable Costs 340.0   372.0
Total Operating Costs 490.0   522.0
a Domestic price numeraire (See Appendix 15)

7. Capacity utilization in this sample processing project builds up over three years at utilization rates of 50, 80, and 100 percent, and then is sustained at maximum capacity. The fixed operating costs include administrative labor and nontradable items for office supplies. The variable operating costs include traded materials with an 11 percent import duty, and negligible handling and transport costs; utility services, which are largely sold at full cost price; and operating labor with an opportunity cost of 75 percent of the annual wage level. A shadow exchange rate factor of 1.4 is applied to the nontax element of traded costs.

8. Table 2 illustrates the calculation of each component of working capital within a project with a one-year construction period and a ten-year operation period, on the basis of the assumptions above. The annual change in working capital is summarized in the bottom row. It is this annual change in working capital and the corresponding residual value that is entered into the project statement for economic analysis of projects.

Table 2. Calculation of Changes in Working Capital (Economic Costs)

Years 0 1 2 3 4 5 6 7 8 9 10
Capacity Utilization      50% 80% 100% 100% 100% 100% 100% 100% 100% 100%
Operating Costs
Fixed 21 150 150 150 150 150 150 150 150 150 150
Variable - Materials 21 126 202 252 252 252 252 252 252 252 252
Variable - Utilities   30 48 60 60 60 60 60 60 60 60
Variable - Labor   30 48 60 60 60 60 60 60 60 60
Total   336 448 522 522 522 522 522 522 522 522
Working Capital
Initial Stocks 21 34 42a 42 42 42 42 42 42 42 0
Change in Initial Stocks   13 8 0 0 0 0 0 0 0 -42
Final Stocks   28 37 44b 44 44 44 44 44 44 0
Change in Final Stocks   28 9 6 0 0 0 0 0 0 -44
Work in Progress   12 20 25c 25 25 25 25 25 25 0
Change in Work in Progress   12 7 5 0 0 0 0 0 0 -25
Change in Working Capital 53 25 11 0 0 0 0 0 0 0 -110

a Two months` worth of materials: 252 x 2/12 = 42.

b One months worth of sales at cost: 522 x 2/12 = 44.

a Value of materials for the production period, plus half the additional value of other variable costs added during processing for the production period: [252 + 0.5 (522-252-150] x 20/250 = 25.


Appendix 5 : Treatment of Working Capital

1. Stocks of materials and spares need to be available to facilitate the smooth functioning of a project`s operations. Stocks of final goods may be held before their sale and distribution. Other materials and inputs will be tied up in partially completed production outputs. For some projects, particularly in agroprocessing or industry, such working capital stocks need to be allowed for in the estimates of initial project investments and included in the project statement at financial and economic prices. They are separate from the annual project costs on operations and maintenance.

2. Several types of projects involve negligible working capital. For example, irrigation and road projects require considerable resources for regular operation and maintenance, including labor. However, they require very small amounts of resources tied up and available as materials and spares. Other projects may require stocks of materials but not outputs, for example, power generation from coal that requires coal stocks at power plants but where the product is not storable.

3. In the economic analysis of projects, the value of working capital is calculated at constant prices. If the level of stocks varies over the year, as for many agriculture-based activities, annual average stock levels are used in the calculations. The project statement for economic analysis should contain a cost row showing annual increases in working capital in early project years. The total stocks held as working capital are released at the end of the project and should be shown as a residual value.

4. For agroprocessing and manufacturing investments, and some other projects, working capital may be an important cost for project assessment and financing. Here a full treatment of working capital is required (see paras. 5, 6, 7, and 8 for an example).

5. The components of working capital are

  • initial stocks of materials equivalent to two months requirement for the following year`s production level, valued at shadow prices;
  • final stocks of outputs equivalent to one months sales in the current year, valued at cost in shadow prices; and
  • work in progress based on a production period of 20 days and a working year of 250 days, at the current year`s production level, valued in shadow prices.

6. Basic data has been prepared on annual operating costs at 100 percent capacity utilization (Table 1).

Table 1. Annual Financial and Economic Operating Costs

Components Financial Cost Conversiona Factor Economica Cost
Fixed Costs
Labor - Scarce 100.0 1.000 100.0
Nontraded Materials 50.0 1.000 50.0
Total Fixed Cost 150.0   150.0
Variable Costs
Materials - Traded 200.0 1.260 252.0
Utilities - Nontraded 60.0 1.000 60.0
Labor - Surplus 80.0 0.750 60.0
Total Variable Costs 340.0   372.0
Total Operating Costs 490.0   522.0
a Domestic price numeraire (See Appendix 15)

7. Capacity utilization in this sample processing project builds up over three years at utilization rates of 50, 80, and 100 percent, and then is sustained at maximum capacity. The fixed operating costs include administrative labor and nontradable items for office supplies. The variable operating costs include traded materials with an 11 percent import duty, and negligible handling and transport costs; utility services, which are largely sold at full cost price; and operating labor with an opportunity cost of 75 percent of the annual wage level. A shadow exchange rate factor of 1.4 is applied to the nontax element of traded costs.

8. Table 2 illustrates the calculation of each component of working capital within a project with a one-year construction period and a ten-year operation period, on the basis of the assumptions above. The annual change in working capital is summarized in the bottom row. It is this annual change in working capital and the corresponding residual value that is entered into the project statement for economic analysis of projects.

Table 2. Calculation of Changes in Working Capital (Economic Costs)

Years 0 1 2 3 4 5 6 7 8 9 10
Capacity Utilization      50% 80% 100% 100% 100% 100% 100% 100% 100% 100%
Operating Costs
Fixed 21 150 150 150 150 150 150 150 150 150 150
Variable - Materials 21 126 202 252 252 252 252 252 252 252 252
Variable - Utilities   30 48 60 60 60 60 60 60 60 60
Variable - Labor   30 48 60 60 60 60 60 60 60 60
Total   336 448 522 522 522 522 522 522 522 522
Working Capital
Initial Stocks 21 34 42a 42 42 42 42 42 42 42 0
Change in Initial Stocks   13 8 0 0 0 0 0 0 0 -42
Final Stocks   28 37 44b 44 44 44 44 44 44 0
Change in Final Stocks   28 9 6 0 0 0 0 0 0 -44
Work in Progress   12 20 25c 25 25 25 25 25 25 0
Change in Work in Progress   12 7 5 0 0 0 0 0 0 -25
Change in Working Capital 53 25 11 0 0 0 0 0 0 0 -110

a Two months` worth of materials: 252 x 2/12 = 42.

b One months worth of sales at cost: 522 x 2/12 = 44.

a Value of materials for the production period, plus half the additional value of other variable costs added during processing for the production period: [252 + 0.5 (522-252-150] x 20/250 = 25.


Posted by Sunil Samdani | comments

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