All 34 Capital Budgeting questions
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What is the role of residual (terminal) value in appraisal? What is a discount factor and how is it used? What is an annuity and how does an annuity factor simplify appraisal? How does inflation affect capital budgeting, and how is it handled? What is sensitivity analysis in capital budgeting and how is it interpreted? Why is NPV considered superior to payback and ARR? How do NPV and IRR differ when ranking mutually exclusive projects? What is the cost of capital and how is it used as the discount rate? How is risk incorporated into capital budgeting decisions? How do taxes and depreciation (capital allowances) affect project cash flows?
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Budgeting & Forecasting › Capital Budgeting

How does working capital investment feature in project appraisal?

Intermediate

Answer

Projects often require an upfront investment in working capital (extra inventory and receivables less payables), a cash outflow at the start (and for increases as the project grows), which is typically recovered at the end of the project as a cash inflow. It must be included in the relevant cash flows for a correct NPV.
Real-world example A new product line needs $50k of working capital upfront, recovered when the project ends.

Common follow-ups: When is working capital invested and recovered? | Why include it in NPV?

Cash Budgeting Capital Budgeting Capital Budgeting
All 34 Capital Budgeting questions