What is an effect of a positive capital gain on terminal cash flow?

A positive capital gain occurs when an asset is sold for more than its original purchase price. This gain is an important factor to consider when calculating terminal cash flow, which is the cash flow at the end of a project's life that includes the sale of assets, working capital recovery, and other final cash inflows or outflows.

When there is a positive capital gain, it means that the asset has appreciated in value, which effectively increases the overall cash inflow from the sale of that asset. This additional cash inflow contributes positively to the terminal cash flow. Therefore, a positive capital gain adds to the terminal cash flow by reflecting the actual profit made from selling the asset beyond what was initially invested.

In terms of financial analysis, recognizing this gain is critical, as it impacts the evaluation of the project's overall profitability and financial performance. By including the positive capital gain, investors and analysts can accurately assess the returns associated with the investment at the project's conclusion.