Quick Question about DCF Construction

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by a searcher from University of Tampa
in United States

3yrs ago

Quick Question about DCF Construction

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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reply by a searcher 3yrs ago
from University of Texas at Austin in Dallas, TX, USA

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.

reply by an intermediary 3yrs ago
from The University of Chicago in Chicago, IL, USA

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".