This article has defined terminal cash flow and its calculation. Also an example too.
If you want to know in easy language, this article is for you.
Whatever, let’s start from the basic.
What is terminal cash flow
Terminal cash flow is net of cash inflow and outflow which left the end of the project to the company. It includes after tax cash from disposing project equipment and working capital recoupment.
TCF is an important part for the company management team. When they approach the budget or cash flow planning, TCF give understanding of project earning for the company. It give more clear data to accept or reject project offer.
When any company accepts the offer to give any service, then they need some initial cash to invest in things like machines and equipment. But after the complete the project they dispose of those machines and equipment because some of these are not now useful for them.
Calculation of TCF is slightly different from another financial matrix but don’t worry, it’s simple.
Calculate terminal cash flow
TCF is cash which is left from project and disposing project equipment. It includes after tax proceeds from equipment and working capital change.
Its calculated by this formula:
Terminal cash flow = after tax proceeds from equipment disposal + any change in working capital
Here, after tax proceeds is cash which the company gets after paying tax.
After tax proceeds from equipment disposal = actual proceeds from equipment disposal – tax on disposal.
Note that, tax on disposal value is calculated after substrate book value from actual proceeds from equipment disposal.
Tax on disposal = (proceeds of disposal equipment – book value of disposal) * tax rate
Take an example.
Assume, a company named ” cash flow click” has offered to construct a bridge from a high authority. Now the Company management team will estimate data of cash flow.
They will suggest that the company needs a crane to construct a bridge which costs approximately $60,000. With that over time the salvage value is $10,000. Also, tax on those machinery equipment has 30% tax and working capital change is $15,000. The management team estimates this crane can be disposed of for $20,000.
So take the key points:
- Investment on machinery: 60,000
- Salvage value of assets: 10,000
- Tax on equipment disposal: 30%
- Estimate proceeds from equipment: disposal 30,000
- Change in Working capital: 15,000
Using this data to calculates other matrices which are necessary for terminal cash flow.
Tax on disposal = (30,000 – 10,000)*30%
= $6,000
After tax proceeds from equipment disposal = (30,000 – 6,000) = 24,000
Now include both of value to find out TCF.
TCF = 15,000 + 24,000 = 39,000
Here are all data collected by the team to calculate TCF. At the end sheet will giving the result of cash flow which will be positive another negative.
Advantages and disadvantages
Terminal cash flow gives more accuracy and understanding of offers to reject or accept.
Company can know Estimate the value of the project which is offered from authority.
It’s only used for finite life projects, not for other types.
Sometimes the data of the management team is much different than the actual world project, because it’s only an assumption.
Conclusion
Terminal cash flow is an important concept in the financial world to calculate more accuracy.
Now your time, is TCF useful in your perspective or not.
Tell me in the comment section.