- Depreciation 1,009
= Net capital expenditures) −146
- R&D expenditures 3,320
- Amortization of R&D 3,280
- Acquisitions 1,591
= Adjusted net capital expenditures1,485
Investment in Working Capital
Thesecondcomponentofreinvestmentisthecashthatneeds
tobesetasideforworkingcapitalneeds.Increasesinworking
capital tie up more cash and hence drain cash flows.
Conversely, decreases in working capital release cash and
increase cash flows.
Defining Working Capital
Working capital is usually defined to be the difference
betweencurrent assetsand currentliabilities.However, we
willmodifythatdefinitionwhenwemeasureworkingcapital
for valuation purposes.
- Wewillbackoutcashandinvestmentsinmarketable
securitiesfromcurrentassets.Thisisbecausecashis
usuallyinvestedbyfirmsinTreasurybills,short-term
government securities, or commercialpaper.While
thereturnontheseinvestments maybelower than
whatthefirmmaymakeonitsrealinvestments,they
representafairreturnforrisklessinvestments.Unlike
inventory, accounts receivable, and other current
assets, cash earns a fairreturn and should not be
included inmeasuresof workingcapital.Are there
exceptionstothisrule?Whenvaluingafirmthathas