Is the ratios of 7:11 and 21:33 equal to?
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The company's after-tax cash flow is a measure of the company's cash
generation ability.
- The after-tax cash flow from the sale of the equipment is <u>$16.1 million</u>
Reasons:
The given parameter are;
Original cost of the equipment = $40 million
The type of depreciation = Straight line depreciation
Number of years of depreciation = 5 years
Current price at which it can be sold = $18 million
The tax rate of the firm = 35%
Required:
The after-tax cash flow from the sale of the equipment.
Solution:
The Cash Flow After Tax, CFAT, is given as follows;
CFAT = Net income + Amortization + Depreciation + Other non-Cash Cash Charges
The annual depreciation is given as follows;
Selling the equipment gives;
The Earnings Before Tax (EBT) = $18 million
The Net Income = Income - Tax = $18 million - (35% × $18 million)
The Net Income = $11.7 million
Cash Flow After Tax CFAT = Net income + Depreciation
∴ CFAT = $11.7 million + $4.4 million = $16.1 million
- The after-tax cash flow = <u>$16.1 million</u>
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