Question

Fast Freight, Inc. is planning to purchase equipment to make its operations more efficient. This equipment has an estimated life of 6 years. As part of this acquisition, a $75,000 investment in working capital is anticipated. In a discounted cash flow analysis, the investment in working capital (E)

a. Should be amortized over the useful life of the equipment.
b. Should be treated as a recurring cash outflow over the life of the equipment.
c. Should be treated as an immediate cash outflow
d. Should be treated as an immediate cash outflow recovered at the end of 6 years

Answer 1

The correct option is D

Investment in working capital should be treated as an immediate cash outflow by adding it to cost of equipment and it should be recovered at the end of the useful life of the project.

Step-by-step explanation:

In discounted cashflow (DCF) analysis, investment in working is added to initial outlay and it is expected to be treated as cash inflow at the end of project's life.