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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Explain why net operating working capital is included in a capital budgeting analysis and how it is recovered at the end a project's life.

Summary Introduction

To explain: The reason to include net operating working capital in capital budgeting analysis and the process to recover it the end of the project’s life.

Introduction:

Net operating working capital:

The operating assets employed in a business are usually higher than the operating liabilities of the company. This excess is called a net operating working capital. This is to meet the day-to-day needs of the operation.

Answer:

  • The net operating working capital is considered for capital budgeting, as it reflects the net ability to pay current obligations as other daily requirement of the business.
  • It is recovered at the end of the project’s life when inventory and account receivables are reduced.
Explanation
  • Any project is considered for selection after a complete analysis of its benefits and costs...

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