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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