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Changes in the net working capital requirements: a. can affect the cash flows of a project every...

Question:

Changes in the net working capital requirements:

a. can affect the cash flows of a project every year of the project's life.

b. only affect the initial cash flows of a project.

c. only affect the initial and final cash flows of a project.

d. are generally excluded from project analysis due to their irrelevance to the total project.

e. are excluded from the analysis as long as they are recovered when the project ends.

Net Working Capital

Net working capital is difference between current assets and current liabilities.There may be increase or decrease in net working capital due to project.

Answer and Explanation:

  • Working capital is increased or decreased when the project is started. That is in year 0.
  • It will be freed up or recouped at the end of the project life.
  • Hence, it will affect cash flow of initial year and final year.
  • If working capital is increased at the beginning of project it will be freed up and result in cash inflow at the end of project.
  • If working capital is decreased at the beginning of project it will be recouped when the project end and will result in cash outflow at the end of the project.

So ,Answer is C.


Learn more about this topic:

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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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