Question

Consider the following statements about the investment in working capital in a capital budgeting analysis: I. Working capital often increases as the result of higher balances in accounts receivable or inventory necessary to support a project. II. Working capital increases are sources of cash and should be included in a discounted-cash-flow analysis. III. The time 0 cash investment in working capital is included in a discounted-cash-flow analysis as a cash outflow. Which of the above statements is (are) correct? I and II. II only. I only. III only. I and III.

Answer 1

Hence, correct option is I and III.

Step-by-step explanation:

Increase in working capital is only a temporary increase; increased working capital will be recovered at the end of project duration. Hence, increase in working capital should be considered only for the purpose of time value of occurrence of working capital cash flows.