Some investment projects require that a company expand its working capital at the initiation of a project to service the greater volume of business that will be generated.Assuming a project in which the increased working capital will no longer be required after the end of the project,under the net present value method,these changes in working capital should be treated as:
A) an initial cash outflow for which no discounting is necessary.
B) a future cash inflow for which discounting is necessary.
C) both an initial cash outflow for which no discounting is necessary and a future cash inflow for which discounting is necessary.
D) irrelevant to the net present value analysis.

Question

Quizplus · Accepted Answer

The changes in working capital should be treated as both an initial cash outflow for which no discounting is necessary and a future cash inflow for which discounting is necessary. This is because the company will need to invest in additional current assets to support the project, which will result in an initial cash outflow. However, once the project is completed, the company will no longer require the additional working capital, and it can be recovered as a cash inflow at the end of the project. Therefore, both the initial outflow and the future inflow should be considered in the net present value analysis.

Some Investment Projects Require That a Company Expand Its Working