Capital budgeting - Confusion on TNCOCF and NWCINV

Hi Guys

Can somebody clarify the hard rule for me regarding the effects of a projects use of NWCINV?

For example, when calculating initial outlay if NWCINV is positive (change in current assets is greater than change in current liabilities) does this represent a cash outflow initially and then a cash inflow at the calculation of TNOCF?

Likewise, if a project frees up NWCINV, does this represent a cash inflow initially and then a cash outflow a the calculation of TNOCF?

I have a very question which has left me confused:

Which of the following statements best describes the impact of an increase in freed up net working capital on the TNOCF? Answer: TNCOF increases with an increases in freed up NWCINV, meaning non cash assets are greater than non debt current liabilities.

Thanks a lot


Hey PD,

My opinion is below:

  • CA-CL = If ‘CAs’ are more than the ‘CLs’ that essentially means Account Receivables are increasing. Thinking on the WORKING CAPITAL LINES if Account Receivables are increasing that means you are getting cash later, if you are getting cash later then you CURRENTLY have a cash crunch. If you will currently have a cash crunch; you will need to put your own equity to finance the business in the short term (In the form of WCINV) - INITIALLY
  • At the project termination; the logic is that “you will get the principal amount of your investment”. Consider INITIALLY you have invested in Inventory —> Inventory turned into goods —> You sold the goods —> You will get money for the goods —> All ‘Account Payables’ will be liquidated thus whatever you invest; you will get back
  • And I guess freeing up working capital means reducing the non cash current assets and increasing the non-debt current liabilities (Link:



Thanks! Would you be able to explain the difference between the cash flow figures used in the below:

Economic income - After tax cash flows + (ending market value-beginning market value)

Economic Profit - Net operating profits after taxes - $WACC

After tax cash-flows are the cash-flows of the project you are calculating for each year: (S-C-D)x(1-T)+D or (S-C)x(1-T)+(TxD) each year its own

and for the last year also the TNOCF is added, too.

Net operating profit after taxes is coming from the Income Statement, it is EBIT x (1 - tax rate%)

How different is it from operating cash flow?

Also, in NWinv question,

  1. Why assume the CL increasing would only be from accounts receivable? Could it not be cash?

  2. If CA > CL and CA < CL, are both to be construed as cash outlays in calculating initial outlay, we will always be deducting NWinv and never adding?

(I know I’m missing something basic, but help much appreciated)


My opinion is below:

Question 2) - CA>CL = means cash outflow for the company, thus is will need to deploy more capital; CL>CA = cash inflow for the company thus it wont need to deploy additional capital

In the start of the project the company would have investments in inventory etc which wil make the CA>CL

At the end of the project the company will cash back for everything it sold (Like squaring off your position at the end of the day

Question -1) -Can you please explain your question, didn’t understand



For question (1),

Because NWC is derived from the difference between changes in non-cash CA - changes in non-cash CL.

Hence cash is not involved.

Thanks GC and 0volatility.