CS Executive · Corporate Accounting and Financial Management · Capital Budgeting
Gupta Engineering invests Rs 12,00,000 in a machine with 4-year life and Rs 2,00,000 salvage value (straight-line depreciation on the depreciable amount). Annual cash revenues less cash costs are Rs 5,00,000. Tax rate is 30%. Working capital of Rs 1,00,000 is needed at the start and recovered at the end. What is the cash flow in year 4 (including terminal flows)?
The year 4 cash flow is Rs 6,75,000. Operating cash flow after tax is Rs 4,25,000 (profit after tax Rs 1,75,000 plus depreciation Rs 2,50,000). Adding salvage value of Rs 2,00,000 and recovery of working capital of Rs 1,00,000 gives the total terminal-year inflow.
- ARs 4,25,000
- BRs 6,75,000Correct
- CRs 5,25,000
- DRs 6,25,000
Explanation
Depreciation = (12,00,000-2,00,000)/4 = 2,50,000. PBT = 5,00,000-2,50,000 = 2,50,000; tax = 75,000; PAT = 1,75,000. Operating CF = 1,75,000+2,50,000 = 4,25,000. Add salvage 2,00,000 and working capital 1,00,000 = Rs 6,75,000 (salvage equals book value, so no tax on sale). Rs 4,25,000 omits terminal flows.
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