Question

XYZ Corporation is contemplating the replacement of an existing asset used in the operation of its business. The original cost of this asset was $28,000; since date of acquisition, the company has taken a total of $20,000 of depreciation expense on this asset. The current disposal (market) value of this asset is estimated as $18,000. XYZ is subject to a combined income tax rate, t, of 34%. What is the projected after-tax cash flow associated with the sale of the existing asset, rounded to nearest hundred dollars

Answer 1

Answer:

The projected after-tax cash flow associated with the sale of the existing asset is $14,600.

Explanation:

The projected after-tax cash flow can be calculated as follows:

Net book value of the asset = Original cost - Accumulated depreciation expense = $28,000 - $20,000 = $8,000

Capital gains = Estimated current disposal (market) value of the asset - Net book value of the asset = $18,000 - $8,000 = $10,000

Capital gains tax = Capital gains * Tax rate = $10,000 * 34% = $3,400

Projected after-tax cash flow = Estimated current disposal (market) value of the asset - Capital gains tax = $18,000 - $3,400 = $14,600

Therefore, the projected after-tax cash flow associated with the sale of the existing asset is $14,600.