How to calculate initial cash flows?

Solution

The solution is mentioned below −

Fixed capital = $ 2000
Working capital = $ 200
Salvage value = $ 1600
Book value = $ 1200
Tax rate = 28%

Initial cash flows = FC+WC-S + (S-B) * T

                    = 2000 + 200 – 1600 + (1600 – 1200) * 0.28

                    = 2000 + 200 – 1600 + 112

                    = 2312 – 1600

                    = = $712

Here FC = fixed capital, WC = working capital, S = Salvage value, B = Book value, T = Tax rate

• A toy manufacturer company had following data New equipment cost = $ 700000 Salvage value = $ 475000 Additional expenses = $ 17500 Book value = $ 390000 Tax rate = 18% Calculate initial cash flow

Solution

The solution is explained below −

Initial cash flows = FC+WC-S + (S-B) * T

                    = 700000 + 17500 – 475000 + (475000 – 390000) * 0.18

                    = 700000 + 17500 – 475000 + 15300

                    = 732800 – 4750000

                    = $257800

Here FC = fixed capital, WC = working capital, S = Salvage value, B = Book value, T = Tax rate