Certified Management Accountant Practice Exam 2025 — Comprehensive Test Prep

Project termination cash flows typically include the recovery of working capital, which is untaxed, because at the end of a project's life, the working capital that was initially invested can be retrieved. This recovery represents a return of funds to the organization that were previously tied up in the project. Unlike other cash flows that might be subject to taxation, the recovery of working capital is not considered a taxable event. Therefore, this cash inflow can be fully recognized as part of the project's termination cash flows.

In the context of project evaluation, understanding that recovery of working capital contributes positively to cash flow at the conclusion of the project is crucial. It highlights that the funds can be reused or reallocated to new projects, enhancing the overall efficiency of capital management within the organization.

Options that include working capital depreciation, after-tax proceeds from the sale of working capital, and investments in additional working capital do not pertain to the concept of project termination cash flows in the same manner. Depreciation is related to asset allocation and does not directly correspond to cash recovery. After-tax proceeds imply that some form of taxation would apply, and investments in additional working capital would represent an outflow rather than a recovery. This makes the option regarding the recovery of working capital the most appropriate