In evaluating the initial investment for a capital budgeting project,
A) net working capital does not have to be considered.
B) a decrease in net working capital is considered a cash outflow.
C) an increase in net working capital is considered a cash outflow.
D) an increase in net working capital is considered a cash inflow.

Question

Quizplus · Accepted Answer

An increase in net working capital (current assets minus current liabilities) is considered a cash outflow because it represents an investment in additional working capital needed to support the project's operations. This means that more funds are tied up in current assets such as inventory and accounts receivable to support increased sales, while additional liabilities are not yet generated. Therefore, an increase in net working capital should be factored in when evaluating the initial investment for a capital budgeting project.

In Evaluating the Initial Investment for a Capital Budgeting Project