Question

1.

How does payment terms net of 120 days for supplies of PCB impact net working capital considerations?

2.

What is the terminal value? Why is it relevant for capital budgeting?

Answer 1

1

Payment terms net of 120 days means that full payment is expected within 120 days, Generally, the payment terms are net 10 or net 30 and in some cases net 60 based on types of business. However, it is always better to get the payment as soon as possible. The working capital management becomes difficult with the increase in the time given for payment. As the company has to use there own cash for business and always have a problem of a cash crunch. Also, there is more chance of NPA if the date given is so huge because. till 120-day person will be waiting for payment and the other party gets enough time to save themself from trouble due to non-payment.
Also, this cycle may encourage the counterparty to delay the payment to improve there working capital management.

2

Terminal value is the value of a given project beyond the forecast of the project. It helps in valuing a project or firm till perpetuity as it is expected the company is a going concern and the money earned from the project will be reinvested to earn a suitable return.

The terminal value is important in the Capital budgeting because we can't forecast cashflows of a firm or project for an infinite project. so we make an assumption about a sustainable growth and discount rate. And we calculate the terminal value.

As we expect that the money earned will be invested. So it is necessary to take perpetuity in consideration for valuing a project or firm. Hence terminal value is very important in capital budgeting.