Question

we assumed that a firm would recover all of the working capital it invested in a project. Is this a reasonable assumption? When might it be not valid?

Answer 1

Answer-

Explanation:

If the company accepts a new project, the working capital requirement for  the company increases than the previous working capital requirement. Net working capital is the difference current assets and the current liabilities. The working capital requirement changes with change in level of activity. increased working capital increases the cash outlays, it will be added to initial outlays while evaluating capital budgeting. The assumption is that Current liabilities will be paid and the cash portion of current assets will be recovered. The observation at the end is that some receivables are not collected, and some inventory is not sold and sales made on credit could be bad debts, hence, full amount credit sales could not be collected meaning that the 100% of net working capital would not be recovered at the end of the project. There will be difference actual between the working capital recovered and that expected to be recovered. Difference is attributable to the following possible causes. So, making assumption that   the investment made in net working capital could be recovered completely is not reasonable.