To solve this and get it over with, can someone please help. I understand how to calculate CFO…
But for Capital Budgeting…
The Outlay you add NWCInv (Net working capital investment).
In the question, it says: At the beginning of the project, a required increase in current assets of $200,000 and a required increase in current liabilities of $125,000.
Would the initial current outlay be +75,000 or -75,000?
Whatever this amount is, will also show up in the TNOCF.
Can you please go through your thinking? Increase in current assets is a subtraction, and increase in current liabilities is a addiiton…is how i thought of it?
Also, how about if the question says, at the beginning of a the project, a decrease in current assets of $200,000 and a increase in current liabilities of $125,000. Or a decrease in both?
Just be careful with your signs… Say you have to invest 300,000 in a fixed asset. This is a 300,000 outflow. The way you enter it into your calculator for CF at time 0 is - 300,000, right? Let’s say you also have a net increase in working capital (change in current assets > change in current liabilities), So, your current assets increased by 200,000 (this is a USE of cash) and your current liabilities increased by 125,000 (this is a source of cash). You have a net use of cash of 200,000 - 125,000 = 75,000. This is a use of cash, therefore it’s also a cashoutflow in addition to your initial plant investment of 300,000. Total cash outflow at time 0 on your calculator would then be -300,000 - 75,000 = -375,000.
If it were the other way around and your CL went up by 200,000 and CA went up by 125000, then it would be considered a source of cash and your net cash outflow for time 0 would be -300,000 + 75,000 = -225,000.
In any event, the investment in (or reduction of) working capital is expected to reverse in the final year of the project.