capital budgeting

[travelin.man119]

When calculating initial outlay do we always include a change in net working capital? Can someone make it clear on whether we know to add or subtract the change in NWC. thanks

 

[cpk123]

you should. since the project would not be viable without spending what you need. And you will also need to adjust back for the NWC at the end of the project - as that will be money that gets returned to you.

 

[S2000magician]

Think of the change in NWC as a change in inventory.
You invest in new inventory when you start the project (i.e., you buy new stuff to sell), and you sell off that inventory when the project is completed.

 

[sharky7]

travelin.man119 wrote:
When calculating initial outlay do we always include a change in net working capital? Can someone make it clear on whether we know to add or subtract the change in NWC. thanks

Think of it as a normal consequence of starting the project:
1) You need to invest in inventory and then your NWC Investment is positive: more initial outlay, add the figure to it.
2) If it turns out to be that no investment is needed and a reduction in NWC arises: less initial outlay, subtract it from the outlay.
Depending on 1) or 2), the final CF will also include this concept but with the opposite sign.