Capital budgeting decision making and the treatment of working capitalEN
I am currently a student at Strathclyde Business School. I have come across a mind boggling difficulty in a capital budgeting question for my finance assignment.
The question primarily addresses capital expenditure decisions, whether a new machine must be bought to increase production in order to cope up with expected growing demand and thereby reduce dependence on sub-contracting.
My issue is about working capital, for which the question says the capital is a certain % of finished goods and raw materials . I calculated the levels year on year for the cash flow statement perfectly.
However, I also foresee working capital "savings". Previously the inventory was bought from sub contractors since the number of units produced in house was sold away completely. Now the savings arise since the new machine saves GBP 4.50 per product and is able to sustain all demand throughout the year. There are raw material savings too due to economies of scale.
Is it appropriate to include such working capital savings under cash flow statements? The inventory/raw material savings has to be accounted for somewhere I feel. Money saved is money earned, another form of cash inflow that is.