Sunday, May 16, 2010


Terminal Cash Flows – Release of Net Working Capital

Terminal cash flows will include the release of net working capital. It is reasonable to assume that funds initially tied up in net working capital at the time the investment was undertaken would be released in the last year when the investment is terminated. As discussed earlier posts, the net working capital in reality may charge in every period of the investment’s life. Such charges should be considered in computing annual net cash flows. Increase in net working capital is a cash outflow while decrease in net working capital is cash inflow. In practice, it may not be possible for a firm to recover the entire net working capital at the end of the project’s life. The actual amount of net working capital recovered should be considered as the cash inflow in the terminal year.

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