Capital budgeting decision making and the treatment of working capital

Hello everyone,

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.

 

Changes in working capital should certainly be reflected in your projected cash flows in capital budgeting exercises.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
 

Officiis pariatur repellat dolorum illum modi. Nobis atque non a facere non voluptatem quasi. Est culpa ipsum dolore molestiae sed. Vero voluptas ab optio sit quia. Quia odit maiores sint et et sed. Dolore est quisquam ipsum dignissimos.

Modi aliquid recusandae quae. Tenetur non fugiat quos et amet laboriosam qui. Adipisci aliquam ut mollitia provident aut ut. Eligendi et id quia expedita. Nesciunt doloribus ut provident quasi. Sapiente molestias dolore sunt. Qui ut veritatis dignissimos corrupti. Repudiandae aut voluptate voluptas eligendi.

Facere nulla earum rem quos eum est qui eaque. Pariatur quia ab ipsam ipsum explicabo voluptas.

Career Advancement Opportunities

April 2024 Investment Banking

  • Jefferies & Company 02 99.4%
  • Goldman Sachs 19 98.8%
  • Harris Williams & Co. New 98.3%
  • Lazard Freres 02 97.7%
  • JPMorgan Chase 03 97.1%

Overall Employee Satisfaction

April 2024 Investment Banking

  • Harris Williams & Co. 18 99.4%
  • JPMorgan Chase 10 98.8%
  • Lazard Freres 05 98.3%
  • Morgan Stanley 07 97.7%
  • William Blair 03 97.1%

Professional Growth Opportunities

April 2024 Investment Banking

  • Lazard Freres 01 99.4%
  • Jefferies & Company 02 98.8%
  • Goldman Sachs 17 98.3%
  • Moelis & Company 07 97.7%
  • JPMorgan Chase 05 97.1%

Total Avg Compensation

April 2024 Investment Banking

  • Director/MD (5) $648
  • Vice President (19) $385
  • Associates (87) $260
  • 3rd+ Year Analyst (14) $181
  • Intern/Summer Associate (33) $170
  • 2nd Year Analyst (66) $168
  • 1st Year Analyst (205) $159
  • Intern/Summer Analyst (146) $101
notes
16 IB Interviews Notes

“... there’s no excuse to not take advantage of the resources out there available to you. Best value for your $ are the...”

Leaderboard

1
redever's picture
redever
99.2
2
Secyh62's picture
Secyh62
99.0
3
BankonBanking's picture
BankonBanking
99.0
4
Betsy Massar's picture
Betsy Massar
99.0
5
CompBanker's picture
CompBanker
98.9
6
GameTheory's picture
GameTheory
98.9
7
kanon's picture
kanon
98.9
8
dosk17's picture
dosk17
98.9
9
Linda Abraham's picture
Linda Abraham
98.8
10
DrApeman's picture
DrApeman
98.8
success
From 10 rejections to 1 dream investment banking internship

“... I believe it was the single biggest reason why I ended up with an offer...”