This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ll be maintained over the life of the expansion.
Current assets are expected to increase by $22,000, and current liabilities are
expected to increase by $9,000, resulting in a $13,000 increase in net working capital. In this case, the increase will represent an increased net working capital investment and will be treated as a cash outflow in calculating the initial investment. Calculating the Initial Investment
A variety of tax and other considerations enter into the initial investment calculation. The following example illustrates calculation of the initial investment
according to the format in Table 8.2.9
8. When changes in net working capital apply to the initial investment associated with a proposed capital expenditure, they are for convenience assumed to be instantaneous and thereby occurring at time zero. In practice, the change
in net working capital will frequently occur over a period of months as the capital expenditure is implemented.
9. Throughout the discussions of capital budgeting, all assets evaluated as candidates for replacement are assumed
to be depreciable assets that are directly used in the business, so any losses on the sale of these assets ca...
View Full Document
This document was uploaded on 01/19/2014.
- Fall '13