Quick Question about DCF Construction

by a searcher from University of Tampa

1 year ago

Hi all, 

When calculating the increase in NWC, do we take cash and short-term investment from current assets into consideration? 

I know we may not since these are not coming from the daily operation of a company. And the objective of the DCF model is to figure out what the company gains and spends from operating activities.

Can somebody justify my understanding and explain it in a simple word please?

Thanks!

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3 comments

intermediary from The University of Chicago - Booth School of Business

You exclude cash and equivalents (CASH) from NWC if they are "excess". Typical business valuation assumes that the business can run w/o CASH and hence they are "excess".

1 year ago | like reply | 1 like

searcher from University of Texas at Austin

If by short term investment you mean "cash and cash equivalents", then I would not include it. Your change in NWC is part of your walk down to free cash flow, so it is explaining the change in cash.

1 year ago | like reply | 1 like

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