Need advice in Corporate finance… CFA book Corporate Finance pg 38 example: In this example, net working capital is added into the cash outflow (understood). Then, in the operating years (year 1 to year 5), the question gives net working capitals for each year. However, in the answer, the net working capital is never deducted from the cash flow projected (as per normal formula, CF=NI+Dep-FInv-NWC+Int(1-tax)), but it’s only until the last year (year 6), then the cash flow recaptures the Net Working Capital, which is a cash inflow. Why we need to recapture the NWC? Why we don’t count the NWCi into year i? Appreciate your comments/advices!
You are using FCFF formula for capital budgeting. Formula should be for terminal value - Salvage + NWINV - t(SalT- Bookvalue)
Wait… just a clarification: Salvage should be + side right? Somemore, I’m trying to make sense the formula, coz according to the book it would be Sales+NWInv-t(Sales-Book). The Sales & t(Sales-book) I understood, but still don’t understand why we need to add the NWInv back…
You spend some money at the start of the project on NWCInv - to start up the Capital budgeting project. When the project dies - you get that money back (it gets freed up) and you can sell the Inv., AR, etc. whatever you procured in the beginning. since you get it back - add it back and account for it at the end cash flow.
K, so I understand it this way: This Net Working Capital is assumed not to be attached with the fixed investment initially (which later become part of the depreciation amount each year), and the later NWCInv is also assumed to be fully recovered. So last question is, whether this later NWCInv which is added back in the end of project was withdrawn from the very initial NWCInv, or it’s simply a fund put anytime into the project? If it’s the later case, then I think we also have to consider the timing of the funing as well right?
it is just a TVM exercise. you put in x money (outflow) at the beginning to do a cap. budget analysis. end of period you remove the same (inflow) x. Bcos it is TVM - you get x/(1+r)^N back. and this makes your cap. budget analysis more meaningful.
just to confirm…so if u hav to spend on the NWCinv…such that your CA-CL is positive your initial outlay would be FCIn+NWC…and TNOCF would be if you can sell your investment in CA: SAL - NWCInv - T(SAL-B)…???
Your NWC should be positive in the 2nd equation. Remember, the 1st equation is an OUTFLOW, while the 2nd equation is an INFLOW.
so basically wat u r computing as ur initial outlay is the outflow…thats y u add it to the whole investment…yeah that wud make sense…