In capital budgeting, why is the working capital added in the last year??? I mean the salvage value is undestood.....but the working capital is required in the very first year rite??? plzz reply
priyank agrawal
(CA )
(26 Points)
Replied 18 April 2011
The reason is that when the business is wind up one get the working capital back in the form of cash after selling inventory and collection of receivable which is invested at the inception of business.
Anit Sharma
(CA Final student )
(460 Points)
Replied 18 April 2011
While computing cash flows we also consider
Net Investment in Working Capital
At the beg of project life , working capital increases from Zero & hence is taken as cash outflows in year Zero
At the end of project life, Working Cap. Falls to zero and hence are taken as cash inflows in the terminal year.
Anit Sharma
(CA Final student )
(460 Points)
Replied 18 April 2011
Net Investment in Working Capital is taken Zero if no information is given in question..
Anit Sharma
(CA Final student )
(460 Points)
Replied 18 April 2011
| Originally posted by : priyank agrawal | ||
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The reason is that when the business is wind up one get the working capital back in the form of cash after selling inventory and collection of receivable which is invested at the inception of business. |
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?????
CA Himanshu Bansal
(Risk Manager)
(2345 Points)
Replied 18 April 2011
| Originally posted by : Anit | ||
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While computing cash flows we also consider Net Investment in Working Capital At the beg of project life , working capital increases from Zero & hence is taken as cash outflows in year Zero At the end of project life, Working Cap. Falls to zero and hence are taken as cash inflows in the terminal year. |
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Simple and good explanation !
And adding more, if the question is to calculate NPV,while calculating the inflows, donot forget to multiply the woking capital amount with last year's PV factor.
Anit Sharma
(CA Final student )
(460 Points)
Replied 19 April 2011
yes, in NPV method
we consider pv factor to calculate pv of cash outfowes/ inflows for that year ...
Anit Sharma
(CA Final student )
(460 Points)
Replied 19 April 2011
want more explaination ..
sen me PM
Umesh S. Goyal
(CA Final Articled Assistant)
(294 Points)
Replied 28 April 2011
When the project started then there is the requirement of working capital in the beginning in form of cash, inentory, spares, receivable etc. to run the day to day activity od project.
And this working capital remains in the project throughout the life of project unless otherwise any uncertain happening is there
And at the end of project life this working capital gets released from the project and this is taken as cash inflow in Terminal year of project.
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