Can someone help me with this concept? I mean I understand how to use it in the formulas and practice problems, but I’m missing the concept of where this investment in net working capital cash comes from, why it goes back at the end of the project… or something?? I must be missing something really simple, so feel free to walk me through it as if I am a two year old. Yeesh, I’m not even sure I am asking the question clearly… ok maybe start with this: NWCInv = change non-cash current assets- change non-debt current liabilities So, what makes these change? The financing of the project??
What does NWC mean? It is Non-cash Current Assets - Non Cash Current Liabilities Non Cash CA = Inventory, Account Receivables… mainly Non Cash CL = Accounts Payable. so if you look at something that starts up - you are investing in Inventory to start up the company. When the company / project dies down - you sell back all that accumulated Inventory.
You are undertaking a restaurant-project with a +NPV and/or a IRR>COC Now to start a restro - you need some initial investments in CA and CL. So the NWC changes due to undertaking of the project. This has to be incorporated in the Initial Outlay of the NPV calculation. Like your NWC changed by $150K due to cutlery item purchase, gas pipelines, furnace, bla… Tham means you had to invest $150 upfront to start the project. Now when the project gets over, may be in 5 yrs span. These NWC get released, as you no longer need the kitchen, the cutlery, the baking furnace - So in the Terminal Value calculation you rollback the transaction of NWC(inv). If you had to shell money initially - you will addback the NWC If resources were released due to this undertaking - you will subtract the NWC
gas pipelines, furnaces etc. is more PP&E which is Non-Cash Non-Current Assets - and will not qualify as NWC… Cutlery too in a restaurant sense would be PP&E. I think more like stuff that would be truly inventory like in nature - maybe meat for say 3 months supply, sauces, vegetables etc…
very correct cpk - Just to make him absorb the concept took simple examples. … and it’s a thursday morning with friday pretty far-off than expected 
swaption and cpk, thanks for the help, I get it now. One more q, can you provide a simple example of where resources may be freed up due to undertaking a new project?
say you decided to go with some new technology item - had to invest in the new technology (new inventory for that) but this gave you some way of being able to sell away some of the old inventory accumulated. That old inventory was nonetheless valuable, only no longer relevant with your new technology for which you are going in with a Positive NPV project…
I’m hungry now.
You didn’t get the cookie too?
I’m a little depressed. I want to be as helpful as I was in L1, but I log on only to see CP and you answering all the questions before I can get to them 