Why working capital is added in calculation of Avg. investment in ARR method of capital budgeting?
Kindly explain with clear logic.
Faiz Ahmed ( Article Trainee) (1731 Points)
24 August 2010
Why working capital is added in calculation of Avg. investment in ARR method of capital budgeting?
Kindly explain with clear logic.
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 24 August 2010
Attn: Mr Faiz Ahmed
I am not an expert still lay down
ARR = PAT/ Average Initial Investment
This initial Investment may consist of outflow for Fixed Assets and Working Capital also since working capital is needed in the begining for the project to generate returns.
Initial Working Capital=Initial Investment
In between Flows=changes in working capital
In terminal Flow we have recapture of working capital
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 24 August 2010
Thnx Mr. Sivaram for clearing my doubt.
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