In capital budgeting analysis,an increase in working capital can be shown as:
A) a cash inflow at the beginning of the project.
B) an outflow at the beginning and an equal inflow at the end of the project.
C) an inflow at the beginning and an equal outflow at the end of the project.
D) a decrease in the initial amount invested.

Question

Quizplus · Accepted Answer

An increase in working capital is considered as an outflow at the beginning of a project because it represents an additional investment in current assets. However, it is not considered as an expense because it is recoverable at the end of the project. Therefore, the outflow at the beginning of the project is matched by an equal inflow at the end of the project. This results in a net cash flow of zero over the project's life. Option B reflects this cash flow pattern accurately.

In Capital Budgeting Analysis,an Increase in Working Capital Can Be