At this stage, we know that when estimating the FCFs of an investment project we need to estimate EBIT*(1-t) or EBIAT, add back Depreciation and any other Non-Cash Expenses, and then we have to subtract Investments required by the project, and all of them for each period being forecast. When considering required Investments, we have to consider: Investments in Fixed Assets, also called Capital Expenditures or

CAPEX, and Investments in Working Capital (WC), also called Investments in Net Working Capital (NWC) or Investments in Working Capital Requirements (WCR). Sometimes people refer to them replacing the word “Investments” with the word “Changes” in all the previous names. The reason is that the amount invested in WC (or NWC or WCR) coincides with the change in WC (or NWC or WCR) between this period (that we

are estimating the FCFs for) and the previous one. Sometimes people refer to this kind of investments as Operating Expenditures or OPEX, which may be confusing, since even more often people abbreviate Operating Expenses (a completely different magnitude) as OPEX too. People use WC, NWC and WCR as different names for the same magnitude. However, this a problem because Investments in WC is the term chosen

more frequently by more people. However, in this context WC does not have the same meaning that accountants usually give it, which is as (All) Current Assets minus (All) Current Liabilities. Actually in this context, WC is (Some) Current Assets minus (Some) Currrent Liabilities. And in fact, the name which better describes its interpretation is Working Capital Requirements (WCR), which allows us to understand that it is a different

magnitude than WC, but paradoxically WCR happens to be the least used name. With these preamble, we want to focus here in understanding this magnitude of “Investments in WC(R)” in several steps: We said that WCR = (Some but not necessarily all) Current Assets – (Some but not necessarily all) Current Liabilities. Let’s begin by trying to explain and illustrate in the clearest way possible, which Current Assets should be

included and why. It should be almost as obvious as it is for Fixed Assets that the Current Assets described in a) represent an investment. Can you explain why? Can you explain which Current Liabilities should be included in the determination of WC(R) and why? Can you explain why the

remaining Current Liabilities are excluded? The answer to the coming question may have been implicitly or explicitly provided in the answer to c) but, just in case, can you explain why if Current Assets represent an investment as indicated in b), do we need to worry at all about (some) current liabilities as described in c)?