Question

Some investment projects require that a company increase its working capital. Under the net present value method, the investment and eventual recovery of working capital should be treated as:
A) an initial cash outflow.

B) a future cash inflow.

C) both an initial cash outflow and a future cash inflow.

D) irrelevant to the net present value analysis.

Answer 1

Answer:

C) both an initial cash outflow and a future cash inflow.

Explanation:

Net present value method: The initial investment is subtracted from the discounted cash inflows of present value in this approach. If the sum is positive than the project, otherwise it is not beneficial to the company.

In mathematically,

Net present value = Present value of all annual cash inflows after the discount factor is applied - initial investment

The change in working capital impact the initial cash outflows and future cash inflows i.e net present value