The concept of lean manufacturing includes, among other things, a desire to minimize net working capital (NWC). For example, raw materials, inventory, and spare parts are all considered part of NWC. A firm that is "lean" will only keep the bare minimum of these items in stock, and will only reorder as necessary. Done successfully, lean manufacturing can help increase the NPV of project. For example, say an investment in NWC of $91,000 is required at the beginning of a 5-year project (cash outflow), which gets returned at the end of the project (cash inflow). Now say that an operations manager believes that a leaner process can be used in the project. As a result, the NWC investment (and its return) will be cut to $41,000. If the operations manager is correct, by how much will NPV be improved under this leaner process, if the project's WACC is 10%?
The concept of lean manufacturing includes, among other things, a desire to minimize net working capital (NWC). For example, raw materials, inventory, and spare parts are all considered part of NWC. A firm that is "lean" will only keep the bare minimum of these items in stock, and will only reorder as necessary.
Done successfully, lean manufacturing can help increase the NPV of project.
For example, say an investment in NWC of $91,000 is required at the beginning of a 5-year project (
Now say that an operations manager believes that a leaner process can be used in the project. As a result, the NWC investment (and its return) will be cut to $41,000.
If the operations manager is correct, by how much will NPV be improved under this leaner process, if the project's WACC is 10%?
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