NWC in initial investment Outlay

CFA Level II FRA
#1

*** Purchase will initially increase current assets by $20,000 and will increase current liabilities by $25,000**

In the explanation they add back the $5,000 to compute initial outlay. This in turn REDUCES initial outlay. My question is that if liabilities increase by more than assets, wouldn’t that require $5000 of NWC investment, INCREASING initial outlay?

In short, why does initial outlay get reduced when theres a increase in NWC? How is a decrease in working capital a source of funds that reduces initial outlay?

#2

You borrowed $25k but you only spent $20k for the WC. Therefore you are up $5k in cash from where you started and your effective outlay is reduced.

1 Like