TNOCF - Terminal Net Operating Cash Flow (NWC qn)

CFA Level II Corporate Finance
#1

The formula for TNOCF states

TNCOF = Salvage Value + NWC - [Salvage value - Book Value@end] x (Tc)

Why is it that an increase in Net Working Capital Investment … leads to an INCREASE inthe terminal cash flow? Surely that shuold decrease your cash flow if you increase your NWC investmen by spending shouldn’t it?

I’m having trouble understanding Schweser’s Reading #22 EOC Qn # 3 & 4 whereby ’ the NWC will return to original level when the machine is sold after 6 years '.

Thanks

#2

As far as I understand, it is believed you can recover your working capital investment upon “exit”. Therefore, although WCInv results in cash outflow initially, when business is terminated that working capital is sold out and therefore adds cash to the terminal cash flow.

#3

thanks