Question

Suppose you sell a fixed asset for $99,000 when its book value is $129,000. 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 correct answer to the problem is $110,700

Step-by-step explanation:

From the provided information,

Book value of fixed asset = $129,000

Sale value of fixed asset = $99,000

If a fixed asset is sold at a loss, the after-tax cash flow is calculated by adding to the sale value, the taxes on losses on the sale of the asset.

Therefore, the after-tax cash flow of the sale will be

book value of asset + (sale value of asset - book value of asset)(1 - marginal tax rate)

= 129000 + (99000 - 129000)(1 - 0.39)

129000 + (-30000)(0.61)

129000 - 18300

= $110700

The after-tax cash flow of the sale will be $110,700

Answer 2

$110,700

Step-by-step explanation:

Since the asset has been sold at the loss of $30,000(129,000-99,000), therefore, the tax benefit amounting to the $11,700(30,000*39%) will be added to the sale price of fixed asset to calculate the after tax cash flow of the sale.

Based on the above discussion, the after tax cash flow from sale shall be calculated as follow:

After tax cash flow of fixed asset=sale price of fixed asset+tax benefit from sale of fixed asset

=$99,000+39%(129,000-99,000)

=$110,700