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?
Faiz Ahmed ( Article Trainee) (1731 Points)
25 August 2010Why 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?
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 25 August 2010
Remember Working Capital
capital investments call for working capital investments.It is inconcievable to run a machine without working capital..These are outflows of money and should be considered as such.When the project is closed the working capital investment will be recovered.This working capital recapture is an inflow and should be considered as such
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 25 August 2010
Thnx Mr. Sivaram for replying.
I am not able understand it. Why we do when there is no such cash inflow at the end in the form of WC like that of salvage value realised ??Please explain with simple example..
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 25 August 2010
How investment in WC will be recovered at the end?
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 25 August 2010
Cant explain u in depth as i am also a student like you .it seems when the project is closed the stocks and Debtors will be realised and creditors paid and the net value will be shown as inflows as the project is closed
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 25 August 2010
ok tell me why there is a need to invest WC in the beginning when project is of long term?? How such WC investments is made in the beginning?
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 25 August 2010
Mr Faiz
This was already explained that to generate returns we need working capital apart from Fixed Assets .so initial investment will consist of Investment in Fixed Assets+Investment in Working Capital too namely Inventories
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 25 August 2010
| Originally posted by : Faiz Ahmed | ||
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Thnx Mr. Sivaram for replying. I am not able understand it. Why we do when there is no such cash inflow at the end in the form of WC like that of salvage value realised ??Please explain with simple example.. |
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The better Answer would be because we are treating it as one time project forgetting the going concern concept
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 25 August 2010
See yaar , We are investing in Fixed Assets so we expect returns only from fixed assets. I mean fixed assets contribution will be reflected in profits. So Why to bring inventories in long term contribution scene???
I think i am asking too many questions.. I will be able to understand better when i get some logical examples..
Don't mistake me
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 25 August 2010
Tell me how you generate returns from Fixed Assets without deploying working capital? let me understand that from you first
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 25 August 2010
No.... working capital will be there in business, but Fixed Assets will help in generating profits . So Fixed assets only should be taken no
Cap. budg. is all about how much particular investment has fetched you. So we should only see FA contribution... am i right??
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 25 August 2010
To generate Inflows and returns you invest in Fixed assets Say Plant and Working Capital Inventories also to generate returns from Fixed Asset.Fixed Asset by itself will not generate any profits
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 25 August 2010
Hey i got it..... See When we invest in FA, we expect higher returns. In order to have higher returns, we will increase production which will increase debtors and so on.. Hence we take WC as outflow in starting and at end we add back to CFAT bcz that cycled funds is released...
Now i understood completely..
Thnx for taking pains in explaning me patiently...
Faiz Ahmed
( Article Trainee)
(1731 Points)
Replied 25 August 2010
Thanks again for making me understand the same.
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 25 August 2010
Faiz it is a pleasure in answering your querries and to the best possible knowledge i gained i used it for explainig the fact remains that i learn more from you when u answer your querries and post some questions in the forum .Thank You Mr Faiz
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