What is Terminal Cash Flows In Capital Budgeting Analysis?

October 6th, 2008 Comments off
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Append below the explanation of terminal cash flows and a simple example as illustration:

Terminal Cash Flows:

  • Is the last stage of a project’s cash flows re: the cash flows that will occur only at the project’s termination/ending.
  • Examples are: salvage/scrap value of new machines less tax and net working capital recovered

Illustration:

Company XYZ intends to buy a new machine to increase its present sales. The machine costs $200,000 with five years of useful life and its salvage value is $25,000. By buying this machine, the company will incur additional yearly working capital requirements of $10,000. Calculate the terminal cash flows.

Solution:

Terminal cash flows= Salvage value = $25,000 + working capital recovered of $10,000 = $35,000

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Financial Accounting

 
 

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