In project analysis, which one of these is a common assumption regarding net wor
ID: 2646200 • Letter: I
Question
In project analysis, which one of these is a common assumption regarding net working capital?
Only changes in current assets are included in net working capital for project analysis purposes. The aftertax salvage value of an asset that is sold is included as a net working capital item. Net working capital will be returned to its pre-project level at the end of a project. Increases in net working capital will be treated as a cash inflow. Any change in net working capital will only occur when a project commences.Explanation / Answer
Net working capital will be returned to its pre-project level at the end of a project (which is Option C)
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Details Provided Below:
Option A is not correct because changes in working capital include both current and current liabilities. Therefore, both have to considered in the calculation of net working capital for project analysis purposes.
Option B is not correct because aftertax salvage value is calculated with the use of sales value and tax on capital gain/loss arising for the sale of asset. It cannot be treated as a current asset and included in net working capital.
Option D is not correct because increases in net working capital will be treated as a cash outflow. Decrease in net working capital will be treated as an inflow.
Option E is not correct because changes in net working capital can occur throughout the life of the project. It is not necessary that the changes should occur only at the commencment of the project.