Question

Assume an asset cost $72,800 and has a current book value of $42,760. The asset is sold today for $32,900 cash. The firm's tax rate is 21 percent. As a result of this sale, the firm's net cash flow: 1. will increase by more than $32,900. 2. will increase by less than $32,900. 3. will increase by exactly $32,900 4. will decrease by the difference between the $42,760 and the $32,900.

Answer 1

As a result of this sale, the firm's net cash flow will increase by more than $32,900. The right option is 1.

Step-by-step explanation:

According to the given we have the following:

asset cost= $72,800

current book value=$42,760

sale=$32,900

Therefore, loss=current book value-sale

loss=$42,760-$32,900

loss=$9,860

tax saving on loss=$9,860*21%=$2,070.60

Therefore, net cash flow=$32,900+$2,070.60

net cash flow=$34,970.60

As a result of this sale, the firm's net cash flow will increase by more than $32,900