CFA CFA Level 2 Why do we add back NWCInv in the Terminal Year after tax non-operating cash flow (TNOCF)

Why do we add back NWCInv in the Terminal Year after tax non-operating cash flow (TNOCF)

  • This topic has 1 reply, 2 voices, and was last updated Jul-18 by Stuj79.
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    • investalot
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      The equation for TNOCF is:

      TNOCF = SalT + NWCInv – T(SalT – B-T) 

      Could someone explain to me why we add back NWCInv just so that I can conceptually understand the formula. 

      Thanks!

    • Stuj79
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      It’s simply due to the fact that after the project is complete, any investment in working capital that was required to get it off the ground and run, can now be recouped as it is no longer needed.

      An example would be stores of inventory that were accumulated at the start of the project….projects finished? No need for inventory which frees up net working capital to invest elsewhere.

      Its analogous to the offloading of any fixed capital investment that has any value left after depreciation…..projects finished? Liquidate it and use resources elsewhere.

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