Parker Freight, Incorporated, is planning to purchase equipment to make its operations more...

Question:

Parker Freight, Incorporated, is planning to purchase equipment to make its operations more efficient. This equipment has an estimated life of 6 years. As part of this acquisition, a $75,000 investment in working capital is anticipated. In a discounted cash flow analysis, investment in working capital:

A. Should be amortized over the useful life of the equipment.

B. Should be treated as a recurring cash outflow over the life of the equipment.

C. Should not be included as part of the analysis since the investment in working capital will be recovered at the end of the project's life.

D. Should be treated as an immediate cash outflow as well as a cash inflow recovered at the end of 6 years.

Working Capital:

Working capital, which is also referred to as networking capital, is the difference between a company's current assets and current liabilities. The former includes items such as cash, inventory, and accounts receivable. The latter includes items such as accounts payable, notes payable, and accrued expenses.

Answer and Explanation:

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The correct answer is D. Should be treated as an immediate cash outflow as well as a cash inflow recovered at the end of 6 years.

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What Is Working Capital? - Definition & Formula

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Chapter 8 / Lesson 11
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This lesson explains what working capital is, how it is used in a business, and why businesses need working capital to stay functional. We'll also look at the formula used to calculate working capital.


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