Question

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?

Answer 1

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.