In the FCF formula, when including the NWC component, do you include the change in NWC or the actual NWC for that year? For example, in one problem I just did, the text said: “In her analysis, the investment in working capital will peak in 2010, declining a dime to $2.10 per share in 2011.” In this problem, which asked to calculate FCF for 2011, the answer had $2.10 as the NWC component rather than -.10. SO the actual 2001 NWC was used. However, in another example, just the change in NWC was included. A balance sheet was given and the NWC component was reached by doing: (change in AR + change in Inv) - change in AP. So the change in NWC was the correct component, not the actual for that year. I think I may be missing something to explain why NWC is arrived at differently in these two examples, but can anyone help out? Thanks.
change in NWC
i guess in the first example, the text shold be interprested to mean that NWC changed by 2.20 in 2010 and changed by 2.10 in 2011, rather than the NWC actually falling from 2.20 to 2.10 like i originally thought. here is the full reference to NWC in the vignette: Throughout the high-growth and transitional growth periods, Simmons expects Starshah to be able to limit increases in the investment in working capital to 20 cents per year. In her analysis, the investment in working capital will peak in 2010, declining a dime to $2.10 per share in 2011.
i.e. it doesnt go up by 20 cents each yr, it goes up by 20 cents MORE each year than it did the previous year
I don’t understand whythey used $2.10, but throughout I’ve seen it as change in NWC.
i think you might be confusing “Change in NWC” with “Change in the Investment in NWC” maybe?.. poorly worded thats for sure.
It’s almost same as usual NWC, except it does not include cash and cash equiv (plus something else I forget), so you’re right, it’s not the same as NWC, that\s probably why they call it WC Inv.