Question

At the end of a project, a firm's investment has a salvage value of $4 million. The firm will pay taxes of $.5 million on the sale of the equipment from the investment. What is the net cash flow to the firm?

Answer 1

Net cash flow to the firm = Expected salvage value at the end of project - Taxes paid on sale of equipment by the firm

= $ 4 Million - $ 0.5 Million

= $ 3.5 Million

Explanation:

Refer to the answer.

Please note that in order to find the net profit and loss at the time of equipment sale accumulated depreciation needs to be calculated till the time of sale. We can find the net book value of the asset at the time of sale by deducting the depreciation from the equipment balances in each year till the time of equipment sale. The net book value is then compared with the expected salvage value to find the net profit/loss in the sale transaction.