In 10 years,Helo Company plans to receive $9,000 cash from the sale of a machine that has a $5,000 book value.If the firm is subject to a 30% income tax rate and has an 8% after-tax hurdle rate,the correct discounted net cash flow would be:

Question

Quizplus · Accepted Answer

The net cash flow is the sale price minus the book value, which is $9,000 - $5,000 = $4,000. The tax on the gain ($4,000) is 30%, so the tax is $1,200. The after-tax cash flow is $4,000 - $1,200 = $2,800. Discounting $2,800 at 8% for 10 years gives $2,800 / (1.08^10) = $1,296.40. Adding back the book value of $5,000 discounted gives $5,000 / (1.08^10) = $2,315.00. The total discounted cash flow is $1,296.40 + $2,315.00 = $3,611.40.

In 10 Years,Helo Company Plans to Receive $9,000 Cash from the Sale