One should consider net working capital (NWC)in project cash flows because
A)typically firms must invest cash in short-term assets to produce finished goods.
B)NWC represents sunk costs.
C)firms need positive NPV projects for investment.
D)inclusion of NWC typically increases calculated NPV.

Question

Quizplus · Accepted Answer

Net working capital is the difference between a company's current assets and its current liabilities. In order to produce finished goods, firms need to invest cash in short-term assets such as inventory and accounts receivable. Therefore, changes in net working capital affect a project's cash flows and should be considered in NPV analysis. Choice B is incorrect as NWC represents working capital that is tied up in the firm's operations and can be recovered, and is not a sunk cost. Choice C is incorrect as it is a general financial principle and not directly related to considering NWC in project cash flows. Choice D is incorrect as inclusion of NWC can either increase or decrease calculated NPV depending on the specific circumstances.

One Should Consider Net Working Capital (NWC)in Project Cash Flows