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:
- £20.6 million.
- £23.0 million.
- £26.6 million.
Answer:
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.