CMA Intermediate · Financial Management and Business Data Analytics · Capital Budgeting
Nirmal Textiles will launch a product requiring an initial working capital of Rs 2,00,000 at start, rising to Rs 2,60,000 at the end of year 1. Project life is 3 years, working capital is fully recovered at the end of year 3, and the firm's first-year-end cash flow before working capital change is Rs 5,00,000. Ignoring tax, what is the net cash flow in year 1 including the working capital effect?
The year 1 net cash flow is Rs 4,40,000. Working capital increases by Rs 60,000 during the year, which is an extra cash outflow, so it is deducted from the Rs 5,00,000 operating cash flow rather than added.
- ARs 4,40,000Correct
- BRs 5,60,000
- CRs 5,00,000
- DRs 2,40,000
Explanation
Working capital rises from 2,00,000 to 2,60,000, an additional investment of 60,000 in year 1. Net cash flow = 5,00,000 - 60,000 = Rs 4,40,000. Adding the increase (Rs 5,60,000) is a sign error.
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