FIN3701 Exam Formulae

Capital Budgeting and cash flows

Initial Investment

Cost of new asset 500 000
+ Installation cost 50 000
Installed cost (new) 550 000

Installed cost (Old) 300 000
-Accumulated Depreciation (200 000)
Book Value 100 000
Proceeds from sale (Old) (150 000) – 50 000 Profit
- Tax on proceeds (40%) (20 000) [50 000x0.4]
After TAX Proceeds (Old) 30 000

Increase in A/R 4000
Increase inventory 2000
Increase A/P (2000)
Increase Accruals (3000)
Change in Working Capital 1000

Initial Investment 590 000




Operating Cash Flow

OCF = NOPAT + Depreciation
Where NOPAT = EBIT x (1-T)

, Terminal Cash Flow

Installed cost (New) 300 000
-Accumulated Depreciation (200 000)
Book Value 100 000
Proceeds from sale (New) (150 000) – 50 000 Profit
- Tax on proceeds (40%) (20 000)
After TAX Proceeds (New) 30 000


Installed cost (Old) 200 000
-Accumulated Depreciation (150 000)
Book Value 50 000
Proceeds from sale (Old) (75 000) – 25 000 Profit
- Tax on proceeds (40%) (10 000)
After TAX Proceeds (Old) 15 000

Change in Working Capital 8000

Terminal Cash Flow 53 000