How do I work out the Book Value of Working Capital?
The question is as followed:
A Vale Iron Ore Mine in Canada Investment OperaJng AssumpJons Aswath Damodaran 56 1. The mine will require an iniJal investment of $1.25 billion and is expected to have a producJon capacity of 8 million tons of iron ore, once established. The iniJal investment of $1.25 billion will be depreciated over ten years, using double declining balance depreciaJon, down to a salvage value of $250 million at the end of ten years. 2. The mine will start producJon midway through the next year, producing 4 million tons of iron ore for year 1, with producJon increasing to 6 million tons in year 2 and leveling off at 8 million tons thereauer (unJl year 10). The price, in US dollars per ton of iron ore is currently $100 and is expected to keep pace with inflaJon for the life of the plant. 3. The variable cost of producJon, including labor, material and operaJng expenses, is expected to be $45/ton of iron ore produced and there is a fixed cost of $125 million in year 1. Both costs, which will grow at the inflaJon rate of 2% thereauer. The costs will be in Canadian dollars, but the expected values are converted into US dollars, assuming that the current parity between the currencies (1 Canadian $ = 1 US dollar) will conJnue, since interest and inflaJon rates are similar in the two currencies. 4. The working capital requirements are esJmated to be 20% of total revenues, and the investments have to be made at the beginning of each year. At the end of the tenth year, it is anJcipated that the enJre working capital will be salvaged. 5. Vale’s corporate tax rate of 34% will apply to this project as well.
I have attached the Balance sheet so far