Consider the following statements about the investment in working capital in a capital budgeting analysis:
I. Working capital often increases as the result of higher balances in accounts receivable or inventory necessary to support a project.
II. Working capital increases are sources of cash and should be included in a discounted-cash-flow analysis.
III. The time 0 cash investment in working capital is included in a discounted-cash-flow analysis as a cash outflow.
Which of the above statements is (are) correct?

Question

Quizplus · Accepted Answer

I. This statement is correct because as a project grows, it often requires more inventory and may extend more credit to its customers, leading to higher accounts receivable. Both of these factors increase the need for working capital.III. This statement is correct because the initial investment in working capital (such as additional inventory or accounts receivable) is considered a cash outflow at the start of a project. It is a necessary investment to get the project up and running.

Consider the Following Statements About the Investment in Working Capital