Question

If a company would need to increase net working capital to start a potential new project how should it be treated in the project's cash flow analysis? a. The increase in net working capital should be an inflow as part of the project's initial cash flow. b. The increase in net working capital should be an outflow as part of the project's initial cash flow c. The increase in net working capital times (one minus the company's tax rate) should be an outflow as part of the project's initial cash flow. d. The increase in net working capital times (one minus the company's tax rate) should be an inflow as part of the project's initial cash flow.

Answer 1

C

Step-by-step explanation:

Working capital is the capital used in the daily running of a business.

Working capital = current assets - current liabilities

Working capital is a form of expenditure for the firm.

Thus it is an outflow.

Working capital should be recorded after tax. tax should be subtracted from working capital to determine the eventual outflow

An increase in working capital means more cash is being used in the business. this cash cannot be used elsewhere. this reduces the amount of cash the business can use for other activities. this is why it is an outflow