when calculating terminal year cashflow why is the initial investment in NWC returned in the terminal year?
Question will tell you that the terminalyear cash flow includes return of net working capital . Or not. Look at the question carefully and determine for yourself what to do
Question will tell you that the terminal year cash flow includes return of net working capital . Or not. Look at the question carefully and determine for yourself what to do
As to why it is returned, it’s because this is money that you use to run the project. Once the project is over, the money is taken out of the project and is considered a cash flow in the terminal year.
Do you really need the question to tell you that it is returned? I thought we have to automatically know that it will return when the project is over, you don’t have to use WC to operate it anymore. Is that correct?
if it doesnt say that NWC is returned, which i have no reason why it wouldnt be, then dont include it. but every jv project I’ve seen, has WC funded in the beginning, a min balance maintained throughout the project, and then returned at the end. maybe in the limited situation where there is just enough WC to cover taxes on asset disposal would you not “return it”, but even then you would factor it in the calc.
yea, my question was not about how to approach the questions but rather, why the NWC is returned.
you took the NWC at the beginning of the project for a specific purpose, and at the end you returned that (after selling the NWC left over) because you no longer needed it. It was capital locked up. very similar to why you salvaged your Fixed Capital expenditure. Why didn’t you ask the same question as to why the fixed equipment purchased was salvaged?
Also, looking at it other way: Working capital is mainly your investment in Inventory and the credit you provide to your customers minus any credit you get from suppliers. Once the project is over, you no longer need to invest in inventory and credits to your customers. Also, any previous investments in these areas will free up and be converted back to cash.
It’s also an estimate… as you don’t get back the exact money you put in! So that casts some doubt on the whole model, but to be fair, even with fixed capital, salvage is an estimate.