Question

Question 7 (CHAPTER 10) Your company's boss asked you to estimate the cash flows relevant to a new investment project. In particular, he wants you to focus on Net Working Capital and how it may need to be adjusted for each year of the proposed project. Your answer: Here's the summary of your estimates: If accepted, the 3-year project would require an immediate investment of $30,000 into the Net Working Capital (NWC). It would be necessary to increase the Net Working Capital by $5,000 in each subsequent year of the project. You then summarized the results for your boss as follows: (Fill it out! Pay attention to the signs! A"" sign indicates a cash outflow for the company, while no sign indicates a cash inflow.) Change in NWC in Year 0: Change in NWC in Year 1: Change in NWC in Year 2: Change in NWC in Year 3:

Answer 1

The feature of working capital is that this is required when the operations are in full swing however, once the project is over
the working capital returns to the starting point or gets recovered
Change in NWC- year 0	$     (30,000)
Change in NWC- year 1	$       (5,000)
Change in NWC- year 2	$       (5,000)
Total working capital invested so far	$     (40,000)	This will be recovered at the end of project i.e. Year 3
Change in NWC- year 3	$       40,000