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Computation of Cash Flow after Taxes

Sunny (CA Business) (401 Points)

19 November 2010

XYZ ltd. decided to purchase business of PQR Ltd.

PQR quoted Rs. 100 crores in order to sell its business ( 20 crores of assets and 80 crores as goodwill/brand value)

Now, XYZ ltd. wanted to fund this 100 crores through bank loan . Assuming 12% Interest Rate.

Also, XYZ ltd. would be required to bring in another 15 crores as initial working Capital which will also be brought through Working Capital Loan from Bank. Assuming 12% Interest Rate.

Now while computing cash flow after taxes, Initial outflow(Year 0) will be ???

Whether it will be 100 crores of outflow(business investment) and 100 crores of inflow (loan amt) and additional 15 crores as outflow (working capital loan)??

Whether it should be Nil in the Year 0?

If any information is missing, do let me know..

Thanks

Sunny

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2 Replies

CA Dhiraj Ramchandani (CA, M. com) (10823 Points)
Replied 19 November 2010

In year 0, cash outflow considered will b 115 crores.. Moreover at the end of expected period (not given in Q) of 10 years (assumed), 15 crores for WC will b retained back, i.e at the end of expected period 15 crores will b considered as cash inflow..

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Jithin (Learner) (1057 Points)
Replied 19 November 2010

Hi Sunny, its better to show cash outflow as nil in year 0 and show the outflows in the years in which the loans are repaid. U can also take the initial cash outflow as 115 crores (as suggested by Dhiraj) if the discount rate is 12%(in that case, the loan interest will not be shown as outflows..but u will have to include the tax savings on account of interest as inflows). This method would not give the correct cash flows when the discounting rate is different from the bank loan rate..so better show nil cash outflow in Y0.

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