Final answer:
Net working capital is critical in project cash flows as it ensures there's enough liquidity to cover short-term obligations and maintain operations. It is a key component of the initial project investment and affects the cash flows throughout the project's lifecycle. Both new and established firms may need external sources of financial capital if internal profits are insufficient.
Step-by-step explanation:
One should consider net working capital in project cash flows because it represents the short-term liquidity available to a company, essential for maintaining day-to-day operations. When a firm invests in a long-term project, it is vital to ensure there is enough working capital to cover short-term obligations. Net working capital is a part of the initial investment in any project and changes in net working capital impact the cash flows during the project's life. For example, if a company opts to reinvest profits, it may limit the available working capital for other operational needs. Furthermore, having an insufficient net working capital can limit a firm's ability to respond to unforeseen expenses or investment opportunities.
Early-stage firms often lack sufficient profits to use as financial capital and may need to rely on external sources, such as early-stage investors, to provide the necessary funds for investment and cover the working capital requirements. Additionally, established firms might also face periods of low profits or losses and thus need external financial capital sources to maintain their investments and operational liquidity. In all cases, careful management of net working capital is crucial to ensure the viability of new and ongoing projects.