From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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The time value cost of a working capital requirement

The time value cost of a working capital requirement

From the course: Accounting Foundations: Making Business Decisions Using IRR and NPV

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The time value cost of a working capital requirement

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- Working capital is the difference between current assets and current liabilities. The amount of working capital represents the net additional investment necessary to operate a business over and above the cost of purchasing fixed assets. Consider this example, you want to open a retail store the store location costs $10 million but the initial stock of inventory costs another $4 million and you will need a minimum of $1 million in cash in your company bank account to handle the daily cash needs. You estimate that your accounts receivable will grow to $2 million before your credit customers begin to pay. So how much external financing do you need in order to open your business? Well, you won't need $10 million just to buy the location. You need $17 million in total financing. $7 million of this, is the financial initial investment in working capital. Now, the interesting thing about working capital is that when the project…

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