Financial Management: Core Concepts, Third Edition

13.5 The Effect of Working Capital on Capital Budgeting

When we introduced working capital management, we said that it is the operational side of the budgeting process. We also need to understand how this operational part of working capital affects the capital budgeting decision process. When a new project or business begins, it is necessary to consider the funding of the working capital that is part of the project. In Chapter 12, we noted how the increase of working capital at the beginning of a project is offset by a reduction of the same amount at the end of a project. To see further how working capital has an effect on the capital budgeting decisions of a company, let’s look at Sally’s Catering Company again.

When Sally’s Catering Company ...