Question

An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project. The company has a tax rate of 30%.

This transaction will have what impact on the project's initial outlay?

A) reduce it by $20,000
B) reduce it by $6,000
C) reduce it by $15,000
D) reduce it by $50,000

Answer 1

D) reduce it by $50,000

Step-by-step explanation:

The project's initial outlay refers to how much money is needed to start a project. This transaction will result in recaptured depreciation since the asset had already been depreciated by $30,000 more than the selling price. This $30,000 in recaptured depreciation = $9,000 in income taxes. So the net effect of this sales would be = $50,000 - $9,000 (tax liability) = $41,000 after recaptured depreciation.

Since the tax liability doesn't have to be paid immediately, we can assume that the $50,000 will be used to reduce the initial outlay.