Net Working Capital should be considered in project cash flows because:
A) Firms must invest cash in short-term assets to produce finished goods
B) They are sunk costs
C) Firms need positive NPV projects for investment
D) None of the above

Question

Quizplus · Accepted Answer

Net Working Capital should be considered in project cash flows because firms need to invest cash in short-term assets, such as inventory and accounts receivable, to produce finished goods. As the project generates revenues, these short-term assets will be converted back into cash, but until that happens, they tie up working capital that could be used elsewhere in the business. Therefore, the changes in working capital affect the cash flows of the project and should be considered in the analysis.

Net Working Capital Should Be Considered in Project Cash Flows