When terminating a project for capital budgeting purposes, the working capital o

Question

When terminating a project for capital budgeting purposes, the working capital outlay required at the initiation of the project will

a. not affect the cash flow.
b. decrease the cash flow because it is an outlay.
c. increase the cash flow because it is recaptured.
d. decrease the cash flow because it is a historical cost.

If depreciation expense in year one of a project increases for a highly profitable
company, ________.

a. net income decreases and incremental free cash flow decreases
b. net income increases and incremental free cash flow increases
c. the book value of the depreciating asset increases at the end of year one
d. net income decreases and incremental free cash flow increases

Explanation / Answer

B Additional working capital will result in additional cash outlays. D Since depreciation is an expense it will reduce net income. However, since it is a non-cash expense that reduces income before taxes and thus reduces cash outflow for taxes, it increases cash flow.

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