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Net Cash Flow Calculation Examples

The document outlines methods for calculating net cash flows (NCFs) for a project, using two examples involving asset liquidation and bond restructuring. The first example demonstrates the top-down approach for calculating NCF from the liquidation of a fixed asset, while the second example discusses the implications of debt restructuring through bond issuance and repurchase. Key calculations include tax impacts and cash flow projections, ultimately assessing whether the company should proceed with the restructuring proposal.

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52 views1 page

Net Cash Flow Calculation Examples

The document outlines methods for calculating net cash flows (NCFs) for a project, using two examples involving asset liquidation and bond restructuring. The first example demonstrates the top-down approach for calculating NCF from the liquidation of a fixed asset, while the second example discusses the implications of debt restructuring through bond issuance and repurchase. Key calculations include tax impacts and cash flow projections, ultimately assessing whether the company should proceed with the restructuring proposal.

Uploaded by

Hoàng Mạnh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Basic methods to compute NCFs for a project

Example 1: SBF sold a fixed asset with the following information: This fixed asset was purchased few
years ago at a price of 100 million VND; The accumulated depreciation of this asset up to the time of
liquidation was 80 million VND; The liquidation price (excluding VAT) was 25 million VND; The associated
cash expenses (such as repairing, dismantling, transportation costs) were 10 million VND. Requirement:
Calculate the net cash flow that NEU received from the above liquidation using the following methods:
Top-down approach, Bottom-up approach, and Tax shield approach. Assume that: Corporate income tax
rate is 20%. No delayed payment. NEU had other profitable operations that were sufficient to cover any
losses related to the given liquidation.

Top-down

NCF = Liquidation price – associated cash expenses – tax x (liquidation price – associated cash expense –
book value)

= 25 – 10 – 20% x [25 – 10 – (100 – 80)] = 16

Bottom-up

Tax shield

Example 2: NEU Corporation issued bonds worth $120,000,000 ten years ago with 20 years left until
maturity. The bonds make annual payments and have a coupon rate of 12%. The flotation cost of the
bonds ($3,600,000) is amortized over 30 years using the straight-line method. NEU has the right to
repurchase these bonds at a price 10% higher than their face value. The company's CFO is confident that
NEU can issue new bonds worth $120,000,000 with a 20-year maturity and a coupon rate of 10% to
repurchase the current bonds. To ensure sufficient funds for this debt restructuring, the new bonds will
be issued one month before the repurchase of the current bonds. The short-term investments currently
have an average interest rate of 2% per month, and the long-term interest rate is projected to be no
lower than 10% per year. The flotation cost of new bonds is $2,800,000 and will be amortized evenly
over 20 years. The corporate income tax rate is 30%. Should the company accept this debt restructuring
proposal? Why? (Assumption: Both new and current bonds are issued at par value).

NCFi (I = 1….20) = - 10% x 120 mil (new coupon payment) + 10% x 120 mil x 30% (tax savings from new
coupon payments) + 2.8 mil / 20 x 30% (tax savings from the annual amortized flotation costs of new
bonds) + 12% x 120 mil (old coupon payment) – 12% x 120 mil x 30% (tax savings from old coupon
payment) - 3.6 mil / 30 x 30% (tax savings from the annual amortized flotation cost of the old bonds) =
1.686 mil

CF0 = 120 mil - 2.8 mil – 120 mil + 120 mil x 2% x (1 – 30%) – 120 mil x 12% / 12 x ( 1 – 30%) – 120 mil –
10% x 120 mil x (1- 30%) + (3.6 mil – 3.6 mil / 30 x 10%) x 30% = -9.2836 mil

NPV = 10% x ( 1 -30%)

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