I am trying to get conceptual understanding of AFN (Additional Funds Needed) in

Question

I am trying to get conceptual understanding of AFN (Additional Funds Needed) in corporate finance. Could somebody clarify what it actually is?

To be more specific, does it or does it not include the purchase price of the machine, or is it the funds on top of the purchase price? If it does, where in the formula is it included and how/where exactly do we account for it? If it doesn't, then why do we not take the purchase price of the machine into the account when we calculate the Net Present Value, which includes the WACC, the AFN, and the future cash flows? Isn't the purchase price of the machine essential to determine the NPV, or how much the machine will bring us net of ALL cash outflows?

Lots of questions here, but it really is just one: what exactly is AFN?

Explanation / Answer

Additional fund needed is the amount required to fund the expansion or growth in the business.It is calculated by substracting increase in laibilities and retained earnings from increase in assets. This will give the amoutn that is required to be raised from external sources to fund increase in assets.

It includess the purchase price of the machine because assets used in calculation AFN refers to total assets i.e. Current assets and fixed assets.. In the formula for AFN, purchasse price of machine is included as increase in assets.

It is not considered while calculating NPV because it is already included in AFN.

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