IMANET Exam CMA Topic 4 Question 25 Discussion

For capital budgeting purposes, the net investment is the net outlay or cash requirement. This amount includes the cost of the new equipment, minus any cash recovered from the trade or sale of existing assets. The investment required also includes funds to proide for increases in working capital, for example, the additional receivables and inventories resulting from the acquisition of a new manufacturing plant. The investment in working 'capital is treated as an initial cost of the investment, although twill be recovered at the end of the project (its salvage value equals its initial cost). For Kline, the additional current assets will be 30% of sales, but current liabilities can be used to fund assets to the extent of 10% of sales. Thus, the initial investment in working capital will equal 20% of the $6 million in sales, or $1,200,000. The total initial cash outlay will consist of the $8 million in new equipment plus $1,200,000 in working capital, a total of $9.2 million.