Some Investment Projects Require That a Company Expand Its Working

question 71

Multiple Choice

Some investment projects require that a company expand its working capital at the initiation of a project to service the greater volume of business that will be generated.Assuming a project in which the increased working capital will no longer be required after the end of the project,under the net present value method,these changes in working capital should be treated as:

• A) an initial cash outflow for which no discounting is necessary.
• B) a future cash inflow for which discounting is necessary.
• C) both an initial cash outflow for which no discounting is necessary and a future cash inflow for which discounting is necessary.
• D) irrelevant to the net present value analysis.

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Definitions:

Non-Eligible Dividends

Dividends paid from earnings that are not eligible for the enhanced dividend credit in certain jurisdictions, typically leading to higher tax rates for the recipient than eligible dividends.

Cash Flow

The net amount of cash being transferred into and out of a business during a specific period.

Cash Flow from Operations

This reflects the cash that a company generates from its regular business activities, excluding long-term capital and investment costs.

Net Working Capital

The difference between a company's current assets and its current liabilities, indicating the short term liquidity of a company.