Calculation of operating cash flow after tax

[Jones473]

In practice test England (Corporate Finance) and question number 1 we are supposed to calculate the after tax operating cash. The answer is 0,81. In the table additional net working capital is listed as 0,43 and my question is why is not this deducted so that the after tax operating cash flow is 0,38 which is also one of the answer alternatives? This is the formula:
Annual after-tax operating cash flow: CF = (S – C – D)(1 – T) + D
Why do we not deduct working capital from this amount, as it is a part of the operating cash flow?

 

[Flashback]

Operating expenditures related to WC are in OCF marked with letter C. Investments in WC are contained in Inital Outflow outlay and are not in OCF. Consider it as a project which have its beginning starting with investments into FC and WC, incremental CFs (OCFs) and end (TNOCF).

 

[olajideanuoluwa001]

Like flashback pointed out, working capital is part of initial outlay and terminal cash flow, thus has nothing to do with operating cash flow.

 

[Jones473]

Yes I agree. However in this exercise, the working capital also increased every year. So per definition the real cash flow was lower than if not deducting working capital. I would agree with you guys if it was only an initial outlay though.

 

[M_Mitchell08]

Flashback is right.
Basically an increase in working capital, not an investment in working capital, would be a reduction of cost. In the formula you’re trying to use, (S-C-D), a decrease in cost would be -(-C) so you’d be adding in this instance. Think about it, reducing cost essentially means more after tax cash.