In what ways is the cash flow table used to organize the data for permanent working capital asset decisions similar to and different from the cash flow table used in capital budgeting?
The two cash flow tables are similar in form. They both are spreadsheets that list each forecasted change to cash flows in a row identifying why the cash flow is changing and in a column identifying when the change is expected to occur. They both serve to organize the forecasted cash flows in a way that is amenable to time value analysis. The tables differ in two respects. First, capital budgeting projects have a finite time horizon. In the cash flow table, this is identified by the right-most column which is labeled “Year N,” where N is the last year of the project’s life. Permanent working capital proposals, on the other hand, typically will change the company’s cash flows for the lifetime of the firm. For a company considered a “going concern”, we usually treat this as an infinite time horizon and make the right-most column in the cash flow table “Years 1-N.” Second, the specifics of each cash flow differ due to the nature of the flows. The cash flows in a capital budgeting proposal come from the costs and benefits of fixed assets and require calculations dealing with such things as the tax shield from depreciation and operating efficiencies. By contrast, the cash flows from permanent working capital opportunities deal with the current accounts, hence the numbers we must obtain for the cash flow table come from such things as bad debts, discounts granted and taken by customers, and the costs of administering receivables, payables, and inventories.
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