In capital budgeting analysis, an increase in working capital can be shown as:
A)A cash inflow at the beginning of the project
B)An outflow at the beginning and an equal inflow at the end of the project
C)An inflow at the beginning and an equal outflow at the end of the project
D)A decrease in the initial amount invested

Question

Quizplus · Accepted Answer

An increase in working capital represents an outflow at the beginning of the project (to finance the increase) and an equal inflow at the end of the project (when the working capital is recovered). Therefore, the answer is option B, where an outflow at the beginning and an equal inflow at the end of the project is shown. Option A is incorrect because an increase in working capital is not a cash inflow, but rather an increase in current assets. Option C is incorrect because an increase in working capital is not a cash outflow but a cash requirement, which is recovered at the end of the project. Option D is incorrect because an increase in working capital would increase the initial investment, not decrease it.

In Capital Budgeting Analysis, an Increase in Working Capital Can