Wize University Introduction to Finance Textbook > Cash Flow Estimation
Net Working Capital
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Net Working Capital
- Net Working Capital is simply the difference between a company's Current Assets and Current Liabilities.
- When networking capital changes, a cash flow is created.
- A decrease to NWC is a cash inflow
- An increase to NWC is a cash outflow
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Example: Net Working Capital
ABC Inc is considering purchasing a new piece of equipment to use in its operations. The purchase price of the equipment is $250,000 and would require an additional $20,000 for delivery and installation. In order to use the machine, the company will need to begin carrying $10,000 of additional spare parts inventory. The machine has an estimated useful life of 4 years, and management believes that at the end of year 1 it will need to increase the spare parts inventory to $15,000. At the end of the 3rd year, spare parts can be decreased by $8,000 and will be completely eliminated upon completion of the project.
What is the change in net working capital in each year?
Practice: Net Working Capital
Wize Corporation is planning the acquisition of a new building in Austin, Texas. The cost of the building is $1,000,000. The closing fees are expected to be $10,000 and the building will require some repairs before it can be used, the cost of these repairs is estimated at $150,000. Once the building begins being used, additional inventory of $20,000 will be acquired. Inventory will be increase by $4,000 in the second year before the company begins decreasing it equally over the final three years of the buildings useful life. The building will be used for 5 years, after which the company plans on selling it for $2,200,000.
What is change in net working capital in each year?
| Year | Change in NWC |
| Year 0 | |
| Year 1 | |
| Year 2 | |
| Year 3 | |
| Year 4 | |
| Year 5 |