Question

Increases in net working capital (NWC) are reflected as _______________________ in a capital budgeting proposal?

Group of answer choices

if they are related to the project under consideration, they are not reflected

inflows

none of the above are correct

outflows

Answer 1

Net working capital measures the business ‘ability to pay off its current liabilities using current assets. It shows a firm’s short-term liquidity and is useful to vendors and creditors.

Current Assets are short-term assets that can be converted to cash within one year or less. Current Liabilities are short-term financial obligation which are payable in 1 year or less than 1 year.

Formula for calculating the net working capital:

Net Working Capital= Current Assets- Current Liabilities

Increases in net working capital (NWC) are reflected as inflows as it indicates the current assets are more than current liabilities.

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