Question

Suppose you sell a fixed asset for $115,000 when it's book value is $135,000. If your company's marginal tax rate is 39%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Answer 1

Answer:

$122,800

Explanation:

For computing the after-tax cash flow, first we have to determine the loss on sale a fixed asset which is shown below:

Loss on sale of the fixed asset would be

= Selling Price - Book Value

= $115,000 - $135,000

= -$20,000

And the tax rate is 39%

So the tax credit would be

= $20,000 × 39%

= $7,800

Now the after-tax cash flow of this sale would be

= Sale price + tax credit

= $115,000 + $7,800

= $122,800