Question

Suppose you sell a fixed asset for $112,000 when its book value is $112,000. 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)?

Answer 1

Answer:

The after tax cash flow will be $112,000.

Explanation:

The market value of the fixed asset is given at $112,000.

The book value of the same asset is $112,000.

The marginal tax rate is 39%.

The after tax cash flow will be

= $Book\ value\ +\ (Market\ value\ -\ book\ value)\ \times\ (1\ -\ t)$

= $\ 112,000\ +\ (\ 112,000\ -\ \ 112,000 )\ \times\ (1\ -\ 0.39)$

= $\ 112,000\ +\ (0\ \times\ 0.61)$

= $112,000