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Sir in Tippletine question(March/June2018) why do we separately account for Working capital in our NPV calculation?
Am asking this because we have been given Operating Cash Flow, which is always after adjustment of Working Capital unless told otherwise. In this question nowhere have been told that Working capital needs to be adjusted for, why then do we take account of it separately?
Operating cash flows are never after adjustment for working capital.
The operating cash flow is the profit as adjusted for non-cash items (depreciation). Changes in working capital (e.g. changes in the level of inventory or the level of receivables) do not affect the profit, but do involved cash flows and so need dealing with.
“Changes in working capital (e.g. changes in the level of inventory or the level of receivables) do not affect the profit, but do involved cash flows and so need dealing with.”
Exactly my point sir!! Working capital is adjusted for/dealt with by adding or subtracting it from profits, to arrive at operating cash flow. Which means we don’t need to adjust for it, when are directly served with Operating cash flow figure.
No. You did not read my reply properly.
Changes in working capital do not affect the profit and therefore do not affect the operating cash flows.
In our cash flow workings for the net cash flow each year, we take the operating cash flows and then separately bring in the changes in working capital.This is always the case, just as it was for Paper FM and as I show it in my lectures.
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