Required incremental investment in net working capital

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1. In a discounted cash flow (DCF) analysis, a required incremental investment in net working capital:

a. Should be amortized over the useful life of the equipment, so as to yield an improved estimate of the return on the proposed project.

b. Can be disregarded because the same amount of cash will be recovered at the end of the project's life.

c. Should be treated as a recurring cash outflow over the life of the project.

d. Should be treated as a reduction in the required cash outflow in period 0.

e. Should be treated as an immediate cash outflow that is later recovered when this incremental investment is no longer needed.

2. Accounting makes all of the following contributions to the capital budgeting process except:

a. The theoretical development of appropriate decision models.

b. Linkage of capital investment projects to the organization's Balanced Scorecard (BSC).

c. Conducting post-audits of capital investment decisions.

d. Generation of relevant (i.e., cash flow) data for investment-analysis purposes.

e. Performing sensitivity or "what-if" analysis of proposed capital investments.

3. In a discounted cash flow (DCF) analysis, a required incremental investment in net working capital:

a. Should be amortized over the useful life of the equipment, so as to yield an improved estimate of the return on the proposed project.

b. Can be disregarded because the same amount of cash will be recovered at the end of the project's life.

c. Should be treated as a recurring cash outflow over the life of the project.

d. Should be treated as a reduction in the required cash outflow in period 0.

e. Should be treated as an immediate cash outflow that is later recovered when this incremental investment is no longer needed.

Reference no: EM131202484

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