Workman Company is considering a five-year project that requires a typical investment in working capital, in this case, $100,000. Consider the following statements about this situation:
I. Workman should include a $100,000 outflow that occurs at time 0 in a discounted-cash-flow analysis.
II. Workman should include separate $100,000 outflows in each year of the project's five-year life.
III. Workman should include a $100,000 recovery of its working-capital investment in year 5 of a discounted-cash-flow analysis.
Which of the above statements is (are) correct?

Question

Quizplus · Accepted Answer

In discounted cash flow analysis, the initial investment in working capital is considered an outflow at time 0 (statement I), and the recovery of this investment at the end of the project's life is considered an inflow (statement III). Separate outflows in each year (statement II) are not how working capital is typically treated in such analyses.

Workman Company Is Considering a Five-Year Project That Requires a Typical