TECHNICAL NOTE Cash Flow and the Consistency Principle in Working Capital Management Calculations

By Hakim Lyngstadaas and Terje Berg.

The consistency principle when estimating cash flows states that the net present value of the discounted cash flow should be the same, even when using different estimation methods and techniques.

However, the estimation is not straightforward when estimating nominal and real net change in working capital. A case experiment with 62 students was conducted, the results suggesting that they struggle with the consistency principle when estimating net changes in working capital as part of cash flow analysis.

This technical note proposes solutions to this challenge. The value from this technical note is to ensure correct estimation in net working capital cash flow changes, which contributes to providing an adequate level of liquidity, and gives a sound judgement in business project analysis and estimation of a firm’s value.

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