The investment in net working capital should not be amortized over the useful life of the equipment. First, it is not an amortizable item. And even if it were, the amortization would be significant in a discounted cash flow analysis only to the extent that amortization would shield other income from taxation.
When we speak of an expected increase in working capital, we mean we expect accounts receivable and inventory to increase because of the project under consideration. Raw materials inventory may need to be purchased. Accounts receivable will increase as soon as sales are made. We also expect that accounts payable related to the purchased inventory will increase. However, the increase in accounts payable will not be as large as the increases in accounts receivable and inventory. Thus, working capital will increase incrementally by the amount of the increase in current assets (accounts receivable and inventory) less the increase in current liabilities (accounts payable). This incremental increase in working capital requires cash, which is needed to purchase the inventory. And the increase in accounts receivable represents goods supplied or services rendered for which the company has incurred expenses, but for which it has not yet received payment. The incremental increase in net working capital will be recovered at the end of the project's life, when the final accounts receivable are collected, the final inventory is sold, and the final payables are paid.
Although it is true that the investment in net working capital is an immediate cash outflow, this is not the best answer choice.
Cash is involved, as increases in accounts receivable and inventory require cash.
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