Which of the following statements is incorrect regarding cash flows determinatio
ID: 2804011 • Letter: W
Question
Which of the following statements is incorrect regarding cash flows determination for a typical capital budgeting process?
A. All cash flows must be after-tax figures.
B. Infusion of new net working capital should be duly accounted for as a positive initial cash flow.
C. Salvage value is recognized as a positive cash flow at the end of the project’s life.
D. Although difficult to estimate, the amounts of revenue erosion (cannibalization) or lost opportunities due to the project in question should be included as negative cash flows.
Explanation / Answer
The correct answer is B
--------------------------------------------------------------------------------------------------------------------------------
Net working capital is the current asset needed to finance day to day money need of the project.
The required NWC is added in the initial cost of asset or initial cash outflow, so that is a negative cash flow.
However at the end of the project net working capital is added back and considered as cash inflow.
--------------------------------------------------------------------------------------------------------------------------------
Hope that helps.
Feel free to comment if you need further assistance J
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.