Principles of Managerial Finance

CHAPTER 8 Capital Budgeting Cash Flows 375

D 3 $76,000$12,000$64,000

T0.40

Substituting into the equation yields

ICI 3 [$50,000(10.40)]($64,0000.40)

$30,000$25,600$



5



5



,



6



0



0



The $55,600 of incremental cash inflow for year 3 is the same value as that calculated for year 3 in column 3 of

Table 8.9.

TABLE 8.10 The Basic Format

for Determining

Terminal Cash Flow

After-tax proceeds from sale of new asset

Proceeds from sale of new asset

Tax on sale of new asset

After-tax proceeds from sale of old asset 

Proceeds from sale of old asset

Tax on sale of old asset

Change in net working capital

Terminal cash flow

LG6

Review Questions

8–13 How does depreciation enter into the calculation of operating cash

inflows?

8–14 How are the incremental (relevant) operating cash inflowsthat are associ-

ated with a replacement decision calculated?

8.5 Finding the Terminal Cash Flow

Terminal cash flowis the cash flow resulting from termination and liquidation of

a project at the end of its economic life. It represents the after-tax cash flow,

exclusive of operating cash inflows, that occurs in the final year of the project.

When it applies, this flow can significantly affect the capital expenditure decision.

Terminal cash flow can be calculated for replacement projects by using the basic

format presented in Table 8.10.

Proceeds from Sale of Assets

The proceeds from sale of the new and the old asset, often called “salvage value,”

represent the amount net of any removal or cleanup costsexpected upon termina-

tion of the project. For replacement projects, proceeds from both the new asset

and the old asset must be considered. For expansion and renewal types of capital

expenditures, the proceeds from the old asset are zero. Of course, it is not

unusual for the value of an asset to be zero at the termination of a project.