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Year 1 Incremental Cash Flow Analysis

The document provides information to calculate the incremental cash outflow at time 0 (t=0) for a capital investment project. It states that the purchase price of the new machine is $10,000, the market value of the old machine being replaced is $1,000, and the book value is $2,000. It then calculates that the decrease in net working capital is $2,000 and the tax on profits is 35%. Based on this, it determines that the incremental cash outflow at t=0 is -$6,650.

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Farzan Yahya Habib
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13 views1 page

Year 1 Incremental Cash Flow Analysis

The document provides information to calculate the incremental cash outflow at time 0 (t=0) for a capital investment project. It states that the purchase price of the new machine is $10,000, the market value of the old machine being replaced is $1,000, and the book value is $2,000. It then calculates that the decrease in net working capital is $2,000 and the tax on profits is 35%. Based on this, it determines that the incremental cash outflow at t=0 is -$6,650.

Uploaded by

Farzan Yahya Habib
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd

Home Assignment 02

Question 01
Capital investment. Given the following information, what is the project incremental
cash outflow at t = 0? Assume that replacement allows to sell the old machine.

Purchase price of new machine -10000


Market value of old machine 1000
Book value of old machine 2000
Tax rate on profits 35%
Decrease in net working capital requirement 2000
Solution 01

Cash Out flows:


Purchase price of new machine: -10000

Cash in flows:
Decrease in net working capital requirement 2000
Market Value of Old machine 1000
Tax on profits 0.35

Working
Book Value of Old Machine 2000
Market Value of Old Machine 1000
Loss on Old machine 1000
Tax on the loss on Old Machine 350

Final market Value of Old Machine after tax 1350

Increamental Cash Flow at t=0


Working

Decrease in net working capital requirement 2000


Final Market Value of old Machine after Tax 1350
Purchase price od new Machine -10000

Increamental Cash Flow at t=0 -6650

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