Terminal Cash Flow

EXERCISE 01

An asset cost €10,000.00 and accumulated depreciation is €8,000.00 at disposal. It is sold for €2,600.00; the tax rate is 25.00%.

A.Calculate book value, tax and net proceeds.

A.

BV=\mathrm{cost}-\mathrm{accumulated\ depreciation},\quad S_{net}=S-T_c(S-BV)

BV=10000-8000=2000,\quad Tax=0.25(2600-2000)=150

S_{net}=2600-150

€2,450.00.

Terminal Cash Flow

EXERCISE 02

An asset cost €100.00 and accumulated depreciation is €60.00 at disposal. It is sold for €52.00; the tax rate is 25.00%.

A.Calculate book value, tax and net proceeds.

A.

BV=\mathrm{cost}-\mathrm{accumulated\ depreciation},\quad S_{net}=S-T_c(S-BV)

BV=100-60=40,\quad Tax=0.25(52-40)=3

S_{net}=52-3

€49.00.

Terminal Cash Flow

EXERCISE 03

A.Is the tax saving on a loss from selling equipment relevant to project free cash flow?

A.

S_{net}=S-T_c(S-BV)

Yes, if the loss is tax-deductible and can be used. A sale below book value produces an after-tax amount above the sale price by the usable tax saving. If deductions are delayed or unusable, value the tax benefit accordingly.

Terminal Cash Flow

EXERCISE 04

In the final project year, Delta has EBITDA €2,000 and EBIT €1,500. Equipment is fully depreciated by disposal and yields no sale proceeds or disposal costs. NWC at the end of the preceding year is €500 and is fully recovered. Corporate tax is 30%.

A.Calculate final-year project free cash flow.

A.

FCF_N=EBIT_N(1-T_c)+Dep_N+NWC_{N-1}+S_{net}

Dep=2000-1500=500,\quad EBIT(1-T_c)=1500(0.70)=1050

FCF_N=1050+500+500

€2,050. The €1,050 operating profit after tax is only one component.