Change in Net Working Capital treatment on initial cash outlay

CFA Level II Corporate Finance
#1

I came across a problem (supplemental material, not CFAI EOC) that asks for the initial cash outlay of a possible equipment purchase.

One of the line items for this problem stated that the purchase would cause current assets to increase by $15,000 and current liabilities would increase by $10,000 ($5,000 net change).

My thinking is that this positive change in net working capital would cause the initial cash outlay to decrease by $5,000 (i.e., the change in net working capital would be treated as an inflow). However, this is not the case and in the answer explantion, the change in net working capital (+$5,000) is treated as a cash outflow.

I’m having trouble understanding this conceptually. If someone could briefly explain to me why a positive change in net working capital wouldn’t be treated as an inflow I would appreciate it greatly!

#2

Assets increase by $15,000 so you spent $15,000 on additional inventory necessary.

Libailities increase by $10,000 so you borrowed $10,000 to finance the purchase of $15,000 in inventory.

Result is an outflow of 15,000 for assets, and inflow of 10,000 for libailities: -5000 net

#3

So simple, yet so tricky for me.

This makes sense Mosstastic, thanks!

#4

So simple, yet so tricky for me.

This makes sense Mosstastic, thanks!