CFAT Query-- Release of working capital

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This query is : Resolved

Faiz Ahmed (Querist)

25 August 2010 Why we add back release of working capital at the end of useful life of an asset to CFAT?? Why we add that inspite of the fact that at the end only salvage value is realised in cash?

CA Kalpesh Gokani

CA Kalpesh Gokani (Expert)

25 August 2010 Working capital is not a cost of asset. it is included in first year as this WC will be kept invested till the useful life of the asset. After end of the useful ife of the asset this WC will be realesed from such asset or project. so againg it is considered as inflow. So ultimate effect of this would be only notional interest portion which we lost due to investment of WC in this asset at discounting rate.

Salvage value is the amt. which we will get by disposing off the asset at the end of useful life of the asset only it doesnot include WC investment made in 1st year.

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Faiz Ahmed

Faiz Ahmed (Querist)

25 August 2010 Ok but how we recover back WC at the end or how WC comes into picture in that project life?? Why there is a need to invest WC for a long term project?? How such WC investments is made in long term assets?

CA Kalpesh Gokani

CA Kalpesh Gokani (Expert)

25 August 2010 I have already said that WC is not cost to project.. WC is a amount which is used for maintainance of asset or project e.g. loose tools, debtors & creditors which are specifically related to such project, any advance which is required to paid to seller of assets as deposit. so these is considered as WC, which is going to be realised at the end of life of project. Consider best example like some deposite is required to be given to government to obtaing license for project, which will be refunded when project gets over.

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Faiz Ahmed

Faiz Ahmed (Querist)

01 September 2010 Thnx for clarifying my doubt.

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