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Understanding Operating Cash Flow and NWC

Operating Cash Flow (OCF) is calculated as EBIT minus taxes plus depreciation, reflecting cash generated from operations. Net Capital Spending (NCS) includes the after-tax salvage value of the asset at the end of the project. An increase in Net Working Capital (NWC) creates a cash outflow, while it is typically recovered as a cash inflow when a project winds down.

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6 views2 pages

Understanding Operating Cash Flow and NWC

Operating Cash Flow (OCF) is calculated as EBIT minus taxes plus depreciation, reflecting cash generated from operations. Net Capital Spending (NCS) includes the after-tax salvage value of the asset at the end of the project. An increase in Net Working Capital (NWC) creates a cash outflow, while it is typically recovered as a cash inflow when a project winds down.

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spilcuposubsro
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Which of the following best describes Operating Cash Flow (OCF)?

A. Net income minus depreciation


B. EBIT minus taxes plus depreciation
C. Sales minus costs minus depreciation
D. Net income plus taxes plus depreciation

Answer: B
Explanation:
Operating cash flow is calculated as OCF=EBIT −Taxes+ Depreciation . It measures cash
generated from operations before considering capital expenditures or financing decisions.

What should be included when estimating Net Capital Spending (NCS) for a project?
A. Only the purchase price of new equipment
B. Only the depreciation expense of the asset
C. The after-tax salvage value of the asset at the end of the project
D. The book value of the equipment at the end of the project

Answer: C
Explanation:
The salvage value (after tax) is part of capital spending because it represents cash recovered
when the fixed asset is sold at the end of the project.

Which of the following statements about Net Working Capital (NWC) is TRUE?
A. An increase in NWC creates a cash inflow.
B. An increase in NWC creates a cash outflow.
C. A decrease in NWC has no cash flow effect.
D. NWC is ignored in capital budgeting.

Answer: B
Explanation:
When a project requires additional working capital (for inventory or receivables), cash is tied up
— therefore it’s an outflow. When recovered at the end, it becomes an inflow.

Why do we add back depreciation when calculating operating cash flow?


A. Because it increases taxable income
B. Because it is a non-cash expense
C. Because it represents capital spending
D. Because it is an opportunity cost

Answer: B
Explanation:
Depreciation reduces taxable income but does not involve any actual cash outflow, so it is added
back when computing cash flow.

What happens to Net Working Capital when a project winds down?


A. It becomes zero because of accumulated depreciation
B. It remains constant after project completion
C. It is usually recovered and treated as a cash inflow
D. It converts to an expense on the income statement

Answer: C
Explanation:
When the project ends, the firm typically recovers its working capital — for example, collecting
receivables or selling inventory — which generates a cash inflow.

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