Suppose you sell a fixed asset for $99,000 when its book value is $129,000. If your company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i. e., what will be the after-tax cash flow of this sale)

Question

Business

Kelton

15 December, 07:38

Suppose you sell a fixed asset for $99,000 when its book value is $129,000. If your company's marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i. e., what will be the after-tax cash flow of this sale)

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Answers (1)

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Bennett Lin · Answer 1

The correct answer to the problem is $110,700

Explanation:

From the provided information,

Book value of fixed asset = $129,000

Sale value of fixed asset = $99,000

If a fixed asset is sold at a loss, the after-tax cash flow is calculated by adding to the sale value, the taxes on losses on the sale of the asset.

Therefore, the after-tax cash flow of the sale will be

book value of asset + (sale value of asset - book value of asset) (1 - marginal tax rate)

= 129000 + (99000 - 129000) (1 - 0.39)

129000 + (-30000) (0.61)

129000 - 18300

= $110700

The after-tax cash flow of the sale will be $110,700