Under inflationary circumstances the present value calculations can
be made either on money terms or real terms. The term ³money²
is used when the actual amount is referred to. The term ³real² is
used when the effects of inflation on the actual amount have been
removed. Working capital can still be considered either on costs
basis or payment basis. In this research all four ways in considering
working capital/inflation resulted in the same real present value.
Inflation in itself worsened the real present value of working capital
investment, which was due to a continuously increasing need for
working capital. When working capital increases were put at the
beginning of the year inflation worsened the real present value of a
working capital investment by -((1 + i)/i) 100 s per cent, where i is
the real discount rate and s is the rate of inflation. The above
formula was originally derived for the case of stable working capital
volume. However at the end of the present paper it is shown that
the relative worsening of the present value of working capital
investment was also equal for the volume increases in working
capital.
In a later article we shall be dealing with the handling of working
capital in the context of annuity method, IRR and payback.
(The Finnish Journal of Business Economics 3-1982, 255-278)