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Suppose you sell a fixed asset for $118,000 when its book value is $138,000. 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)? (Enter your answer as a whole number.)

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jepessoa

Answer:

$125,800

Explanation:

To calculate the after-tax cash inflow from the sale of the asset we can use this formula:

after-tax cash inflow = asset book value + [(asset market value - asset book value) x (1 - tax rate)]

after-tax cash inflow = $138,000 + [($118,000 - $138,000) x (1 - 39%)] = $138,000 + (-$20,000 x 0.61) = $138,000 - $12,200 = $125,800

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