Discussion
A seasonal plant's promoters have budgeted working capital at ten per cent of fixed capital, as for a continuous plant.
What is the risk?
Answer: B
Correct answer: A year's raw material is bought in one season
Ten per cent is a reasonable figure for a plant buying raw material steadily through the year. A seasonal plant must buy a year’s supply in one season and then hold the product as stock until it sells - so its working capital is far higher, and underestimating it is a common way for such projects to run out of money in their first year.
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