NWCInv vs WCInv

CFA Level II
#1

I know that the formulas are different:

  • WCInv = CA (exc. Cash) - CL (exc. ST debt)
  • NWCInv = ΔWC = Δ (CA excl. Cash) - Δ (CL excl. ST Debt)

But - when do we actually use WCInv?

Corporate Finance:

NWCInv is used in the “Initial Investment Outlay” formula.

Ex) IIO = FCInv + NWCInv

where NWC = CA required for Investment - CL Generated from Investment (which is same as “additional CA and CL” since it is the additional required to fund that specific project)

Corporate Finance makes sense.

_ Equity: _

CFO (and then FCFF and FCFE consequently) official formulas also use WCInv.

The official formula is CFO = NI + NCC - WCinv

Simple Example:

NI $10

  • Depreciation $5
  • Increase in AR $1

+Decrease in AP $1

CFO = $15

My question is:

Doesn’t the CFO formula just look at Changes in the WC?

If so, then why is the formula CFO = NI + NCC - WCinv instead of CFO = NI + NCC - NWCinv

Working Capital itself is a net figure. However, when computing these values in both instance we are looking at the changes in the WC from either 1) Corp Finance- Investing in a project or 2) Equity - Period over period

In both instance it seems like both formulas should be NWCInv formula. Correct? Or am I just completely over thinking this? I know how to do the problems when thrown at me but I am just trying to make sense of the formula. Now that I think about it its almost like the formulas will get you the same answer. I dont know!

#2

It is always deltaNWC. I wonder why they put it up as WC in the formulas. Questions in guides generally give the deltaWC or two years data in the trail balance. So that gives u hint on what to do. Also, for CFO perspective think of it as change in cash. Your previous years working capital expenses wouldnt effect your CFO.Generally speaking, It is your incremental expenditure that u must take into account in CF calculation. However, my question here is how would accrued expenses/unearned revenues be taken into account. I hope they dont complicate it by that much

#3

Can someone please confirm it is always deltaNWC for both CF and FCF?

#4

Since CF or FCF are for a Balance Sheet period it HAS to be delta. Right?

Bueller? S2000?

#5

Right.

Working capital is a stock of capital, therefore you must calculate the variation year to year to be able to add it to FCF (which is a flow, not a stock).

#6

Obviously I remember from level 1 that CFO used the changes in WC and I know how the CF versions relate but just the fact that official curriculum calls the same thing 2 different ways made me second guess myself.

I would call this case closed.