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

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

Step-by-step 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)\ *\ (1\ -\ t)`

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

=
`\$ 112,000\ +\ (0\ *\ 0.61)`

= $112,000