Principles of Managerial Finance

(Dana P.) #1
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.
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