Question

Investment in net working capital is not depreciated because:

a	It doesn't assume fulfillment of the project's potential life

b	It is a sunk cost

c	It is recovered during or at the end of the project and is not a depreciating asset

d	It is not a cash flow

Answer 1

Correct Option is "C", i.e.,

It is recovered during or at the end of the project and is not a depreciating asset. Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation is the allocation of the value of investment assets over predetermined periods of time during an asset's usable, economic life. Certain working capital such as inventory and accounts receivable may lose value or even be written off sometimes, but how that is recorded does not follow depreciation rules. The value of working capital should be evaluated over time to ensure no devaluation occurs, as continuous operations require enough working capital in place.