Question

Suppose you sell a fixed asset for $119,000 when its book value is $139,000. If your company's marginal tax rate is 21 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 of selling a fixed asset for $119,000 when its book value is $139,000 and the company's marginal tax rate is 21 percent would be $114,800.

The effect on cash flows of selling a fixed asset for $119,000 when its book value is $139,000 and the company's marginal tax rate is 21 percent can be calculated as follows:

1. Calculate the gain or loss on the sale by subtracting the book value from the selling price: $119,000 - $139,000 = - $20,000
2. Since the asset was sold at a loss, there is no taxable gain to report.
3. Show the tax savings on the income statement reduces the tax payable on the subsequent income statement by multiplying the loss by the tax rate: $20,000 x 0.21 = - $4,200
4. The after-tax cash flow from the sale would be the selling price minus the tax savings: $119,000 - $4,200 = $114,800