What is the undiscounted cash flow in the final year of an investment, assuming: $10,000 after-tax cash flows from operations, the fully depreciated machine is sold for $1,000, the project had required $2,000 in additional working capital, and a 35% tax rate?
Solution: | ||
Undiscounted cash flow in the final year | 12,650 | |
Working Notes: | ||
Undiscounted cash flow in the final year | ||
=cash flow from operations x ( 1 -tax rate) + Realization additional working capital + salvage value x (1-tax rate) | ||
cash flow from operations x ( 1 -tax rate) | ||
=After tax cash flow from operations | ||
=$10,000 | ||
(realized the investment made initially in | working capital) | |
Realization additional working capital | ||
=$2,000 | ||
salvage value x (1-tax rate) | ||
=after-tax salvage value | ||
=1,000 x ( 1 -tax rate) | ||
=1,000 x ( 1 -0.35) | ||
=1,000 x 0.65 | ||
=650 | ||
Undiscounted cash flow in the final year | ||
=cash flow from operations x ( 1 -tax rate) + Realization additional working capital + salvage value x (1-tax rate) | ||
=10,000 + 2,000 + 650 | ||
=$12,650 | ||
Please feel free to ask if anything about above solution in comment section of the question. |
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