Asked by Brittany Mckinster on Jul 11, 2024
Verified
Some investment projects require that a company increase its working capital.Under the net present value method, the investment and eventual recovery of working capital should be treated as:
A) an initial cash outflow.
B) a future cash inflow.
C) both an initial cash outflow and a future cash inflow.
D) irrelevant to the net present value analysis.
Working Capital
A measure of a company's operational liquidity, calculated as current assets minus current liabilities.
Net Present Value
A financial metric that represents the difference between the present value of cash inflows and outflows over a period of time.
Cash Outflow
Financial transactions that result in the outflow of money from a business, including payments for expenses, investments, and loans.
- Understand the importance of cash flows, including their timing and reinvestment, in evaluating projects.
- Comprehend the handling of depreciation and working capital within calculations of cash flow.
Verified Answer
On the other hand, when the project is completed, it may generate additional cash inflows that can be used to recover some or all of the working capital that was initially invested. These future cash inflows should be included in the net present value analysis as part of the project's total benefits.
Therefore, both an initial cash outflow and a future cash inflow should be treated as part of the net present value analysis when evaluating investment projects that require an increase in working capital.
Learning Objectives
- Understand the importance of cash flows, including their timing and reinvestment, in evaluating projects.
- Comprehend the handling of depreciation and working capital within calculations of cash flow.
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