operations. The former often includes initial investment in Fixed Assets supplemented by “investment” in
NWC, both to be liquidated at the end of the project life. Unlike the ambiguity between CL and Operations
in the accounting SCF, the static offset in capital budgeting is explicitly that of liabilities against assets! This
distortion leads to misspecifications of the project size, cost of capital, risk, and value – errors replicated at
the level of the firm.
2.2. FCF distortion
The textbook FCF statement often subtracts the periodic cash flow of part or all of CL from the cash flow
generated by CA, juxtaposing any remaining CL and a composite asset identified as NWC. Our survey of the
finance literature revealed the following justifications for the offset.
(1) “Current Liabilities are short lived.” Since the company is viewed as a going concern, the focusmust be
on the flow generated by debt contracts of anymaturity. Short-term contracts roll over frequently, but
remain a component of the firm's debt