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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
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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

User Sovanlandy
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Final answer:

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

Step-by-step explanation:

To calculate the after-tax cash flow associated with the sale of the existing asset, we need to consider the book value of the asset, the disposal value, and the income tax rate. The book value is the original cost minus the accumulated depreciation, which is $28,000 - $20,000 = $8,000. The taxable gain or loss on the disposal is the difference between the disposal value and the book value, which is $18,000 - $8,000 = $10,000. Since XYZ Corporation is subject to a combined income tax rate of 34%, the tax on the gain is $10,000 * 34% = $3,400. Therefore, the after-tax cash flow is the disposal value minus the tax on the gain, which is $18,000 - $3,400 = $14,600.

User EmKay
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2 votes

Answer:

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

Step-by-step 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.

User Eesiraed
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