Suppose a company has equipment that had an original cost of $10,000, and it sells this equipment 5 years later for $2,000. If the carrying value of this equipment for tax purposes is $1,000 and he company's marginal tax rate is 35 percent, the cash flow associated with the sale of this equipment is closest to:

Question

Quizplus · Accepted Answer

The cash flow from the sale is the sum of the sale proceeds ($2,000) plus the tax savings from the sale. The tax savings come from the difference between the sale price ($2,000) and the tax book value ($1,000), which is $1,000. This gain is taxed at 35%, so the tax paid is $1,000 * 35% = $350. The tax savings is therefore -$350 (since it's an expense). The net cash flow is the sale proceeds minus the tax paid, or $2,000 - $350 = $1,650.

Suppose a Company Has Equipment That Had an Original Cost