Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company's marginal tax rate is 21 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)?
A) $3,000
B) $5,000
C) $91,050
D) $90,000

Question

Quizplus · Accepted Answer

The loss on the sale of the asset is $5,000 ($95,000 book value - $90,000 sale price). This loss reduces taxable income, leading to a tax saving of $1,050 ($5,000 * 21%). The after-tax cash flow from the sale is the sale price plus the tax saving, which is $90,000 + $1,050 = $91,050.

Suppose You Sell a Fixed Asset for $90,000 When Its