Question

There are seven issues that must be kept track of during a comprehensive cash flow estimation process:

what is the working capital and the opportunity cost?

Answer 1

Followings are the seven issues that must be kept track of during a comprehensive cash flow estimation process;

·        Sunk costs

·        Opportunity costs

·        Erosion costs

·        Synergy gains,

·        Working capital,

·        Capital expenditures, and

·        Depreciation & cost recovery of divested assets

Working capital;

Working capital refers to that part of capital which need to be kept for meeting short-term obligations of the firm. In other words we can say that amount of funds which need to be maintained for normal operations of the bussiness is know as working capital.

In accounting form we know that working capital is the difference between current assets and current liabilities of the business. So excess of current assets over current assets refers to positive working capital whereas reverse position refers to shortage of working capital.

Thus at last we can say that estimation of working capital is very vital element that must be kept track of during a comprehensive cash flow estimation process.

Opportunity costs;

As we know that opportunity cost refers to the cost which arise due to foregone alternative. In other words we can say that ignorance or lost of second most alternative is known as opportunity cost. Cost of lost opportunity is known as opportunity cost. For example you have to make an investment decision and you have two option to invest your money; one is shares of a public company second is treasury bonds. If you selected treasury bonds as your investment destination then you have to ignore treasury bonds then returns that you could earn on treasury bonds will be lost which is known as opportunity cost.