A question about capital budgeting (corporate issues)

Practice question:
Five years ago, Frater Zahn’s Company invested £38 million—£30 million in fixed capital and another £8 million in working capital—in a bakery. Today, Frater Zahn’s is selling the fixed assets for £21 million and liquidating the investment in working capital. The book value of the fixed assets is £15 million, and the marginal tax rate is 40%. The fifth year’s after-tax non-operating cash flow to Frater Zahn’s is closest to:

  1. £20.6 million.
  2. £23.0 million.
  3. £26.6 million.

The terminal year after-tax non-operating cash flow is

TNOCF = Sal5 + NWCInv − t(Sal5 − B5)

= 21 + 8 − 0.40(21 − 15)

= £26.6. million.

My question: Why does the answer ignore the tax effect? In my own calculation, I use 21*0.6.

You have already accounted for the taxes in the last term and it applies only to the gain on disposal. We can rewrite the equation as follows:

TNOCF = Sal5 *(1-t) + NWCInv + t * B5

It is tax affecting the gain on the fixed assets by 40%. The gain is the selling price less the book value.