Question

How to estimate cash flows in the year when you terminate a project before the asset...

How to estimate cash flows in the year when you terminate a project before the asset is fully depreciated? Please use an example to explain it.

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Answer #1

Here is the example

Investment 60000
Revenue 40000 each for 4 years, COGS each 10000 for 4 years
Depreciation SLM, Salvage value 10000
Tax Rate 20%


Solution

Particulars 1 2 3 4
Revenue 40000 40000 40000 40000
Less: COGS 10000 10000 10000 10000
Less: Depreciation
(60000-10000)/4		 12500 12500 12500 12500
EBT 17500 17500 17500 17500
Less: Tax at20% 3500 3500 3500 3500
EAT 14000 14000 14000 14000
Add: Depreciation 12500 12500 12500 12500
Add: Sale of equipment net of tax
(10000 x(100-20)%)		 8000
Terminal Cash Flow 20500
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