hello this is module 10 so we are going to look at relevant cash flow so let's get started and here's the first problem so in this case parker and stone incorporated is looking at setting up a new manufacturing plant in salt park to produce garden tools the company bought some land nine years ago it's a little bit smaller for six million dollars in anticipation of using it as a warehouse and distribution site but the company has since decided to run these facilities from a competitors instead okay if the land were sold today the company will net 10 million dollars the company wants to build its new manufacturing plan on this land the plant will cost 15.2 million to build and the site require 1.3 million worth of grading before it is suitable for construction question what is the proper cash flow amount to use as the initial investment in fixed assets well the answer is 26 million 500 and i believe that's correct so where does uh number coming from well first this company recognized that if the land was sold the company will net 10 million okay so this is an opportunity cost if the company is not selling the land they will not make 10 million and remember we put in opportunity cost number two the plant will cost 15 million 15.2 to build so that's not a problem at all so for sure i will spend 15.2 to build the plant and then there will some preparation that will need to be made before construction so the site will require 1.3 million worth of work before we can start so add 1.3 million and that gives us an initial cash flow of 26 million 500. problem number two we are supposed to calculate the ocf operating cash flow so what we know is sales the cost depreciation and the tax rate and we are asked to calculate earnings before interest and taxes net income operating cash flow and the depreciation tax shield so there is four question well the first and the second question shouldn't be any problem so the first question is ebit so to calculate ebit i basically had we built a little bit part of the pro format income statement so sales was given at 383 cost given depreciation given and the tax rate was given so sales minus cost minus the appreciation is 77 196. 22 of 77 000 er 196 is 16983 ebit minus taxes equal net income so here we have calculated ebit and this is 77196 and we have calculated net income which is 60 213. the next question is to calculate the operating cash flow one of the formula that we can use to calculate operating cash flow is given right here it is ebit plus depreciation minus taxes so ebit 77 000 depreciation which is 56 000 and subtract taxes at 16 000 that give us an operating cash flow of 116 000 another formula that is often used to calculate the ocf is operating cash flow is equal also to net income plus depreciation and in this case net income is sixty thousand uh one hundred and twenty three or two hundred i'm sorry two hundred and thirteen and add uh depreciation 56 700 and you will again obtain 116 9113 so remember to write down all your formulas and see which one you can apply in different cases and then the last question is uh calculate the depreciation tax shield and the depreciation tax shield is the tax rate the marginal tax rate times the amount of depreciation so we know the tax rate we know depreciation so that shouldn't be a problem to evaluate and you should obtain 12 474 so we have now solve all the questions for the second problem the last question we have a on assets that cost four hundred and four thousand eight hundred and this assets is depreciated using the straight line to zero at the end of the life of the assets it is totally depreciated and these assets has a life of 12 year 12 year tax life the assets is to be used in a seven-year project so the assets are life is longer than the length of time we plan to use the assets and at the end this of the end of for the project we think we can sell these assets for 50 600. the relevant tax rate is 25 percent and the question is what is the after tax cash flow from the sales of these assets what is the after tax cash flow from the sales of these assets well step one let's look at the appreciation so these assets is worth 400 and [Music] 4800 that we can depreciate over 12 years that give us 33 733 per year okay so over the course of seven years the accumulated depreciation will be 7 times the 33 733 so what will be the book value the book value is the value of the assets minus the amount that has been depreciated so we start with 404 subtract 236 which is the accumulated depreciation so at the end of seven years the book value of the assets is 168 000. we haven't have time to depreciate the assets to zero yet yeah so this assets is going to be sold for less than the book value right so the book value is 168 right here and how much are we going to sell the assets for 50 000. so the assets is going to be sold for less than the book value so when an asset is sold for more than the book value well we have a capital gain and we have to pay tax on this when an asset is sold for less than the book value we have we use this depreciation tax shield right to calculate a loss that will be recapture so this is a loss and that is coming from the after tax salvage value and if he can recapture that loss well or tax bill next year will be less so what is the after tax salvage value well it is the fifty thousand six hundred plus the differences between 168 the book value and the market value times the marginal tax rate and that gives us 80 116. okay so remember this after tax salvage value is the before tax salvage value plus the depreciation tax shield which is the book value minus the market value times the tax rate and at this stage i need to say even your grades agree that you're going to go places in life congratulations on finishing the practice section on module 10. bye bye thank you