Capital Budgeting Project Evaluation

CFA Level II
#1

I’m looking at LOS 31.a) For the “Terminal year after-tax non-operating cash flows,” why is NWCInv included here? I think I understand why it’s included in the initial outlay, but why do we add the exact amount back at the end? Thanks

#2

i want to say someone just asked this exact question very recently. either that or i’m starting to dream up questions about NWC in my head. assuming that the $$ you lay out in the beginning in net working capital goes to inventory, then think of that last year- you don’t invest in any inventory and you sell off what you had. so you recover your investment as inventory in the terminal year turns into sales.

#3

So in this case, you just assume you can sell the inventory for the same price? Because for the other outlays (e.g. machine) you take into account the residual value. bannisja Wrote: ------------------------------------------------------- > i want to say someone just asked this exact > question very recently. either that or i’m > starting to dream up questions about NWC in my > head. assuming that the $$ you lay out in the > beginning in net working capital goes to > inventory, then think of that last year- you don’t > invest in any inventory and you sell off what you > had. so you recover your investment as inventory > in the terminal year turns into sales.

#4

yes, i think in the context of the CFA material and this capital budgeting stuff, they’re assuming that you can recoup all of the NWC you put in originally (so you don’t have junk inventory, bad credit extended, etc). whether that’s correct or not in the real world and projects do recover exactly the original NWC, not sure. seems like we’re supposed to make that assumption here anyways.

#5

Thanks bannisja! bannisja Wrote: ------------------------------------------------------- > yes, i think in the context of the CFA material > and this capital budgeting stuff, they’re assuming > that you can recoup all of the NWC you put in > originally (so you don’t have junk inventory, bad > credit extended, etc). whether that’s correct or > not in the real world and projects do recover > exactly the original NWC, not sure. seems like > we’re supposed to make that assumption here > anyways.