Terminal cashflow calculation

[jack93]

In a problem that I came across,
I had to find the terminal cashflow.

The alternative I of the problem goes as follows:

If the current computer system is upgraded and new
software is purchased, the cost will be INR 80,000. An additional INR 5,000 will be
required to have the system installed and calibrated for accuracy. The renewed computer
system will have a useful life of just five years and will be depreciated at rate of 40% on
Written Down Value basis. Only the purchase cost of INR 80,000 will be depreciable, not
the installation cost.
At the end of the five year period, the renewed machine can be sold for INR 5,000 before
taxes. The renewed machine would also result in an increase in net working capital of
INR 20,000.

I just want to find the terminal cashflow of this alternative after tax.

What I dont understand is :

The solution indicates the terminal cashflow after tax (40%) to be 25,488.

and only way that I get this answer is by adding the sale value of the asset (5000) + the net working capital (20000) = 25000 + (loss on sale) 1220 * 40%

So my question is
1. Why do you add the working capital in the calculation of terminal cashflow and
2. How can you tax on a capital loss and then add it back to the terminal cashflow calculation?

Someone please help me out !

 

[Lynn Birchall]

Hi

Adding the change in working capital as a cashflow at the end of the 5 years does look a bit odd.

I don't know where the question is from. Did it state (in either the question or the answer) that they were assuming it happened at the end of the 5 years (rather than being spread over the 5 year period) perhaps.

 

[jack93]

Hi,

First of all thanks for the reply...

No. They just deducted it at the start. Then they are adding back the increase in working capital in the last year!

Anyways I am posting the solution ... maybe that will help



Btw this is the Q. 17 of May 2011 paper of IAI.