XYZ Corporation is contemplating the replacement of an existing asset used in the operation of its business. The original cost of this asset was $28,000; since date of acquisition, the company has taken a total of $20,000 of depreciation expense on this asset. The current disposal (market) value of this asset is estimated as $18,000. XYZ is subject to a combined income tax rate, t, of 34%. What is the projected after-tax cash flow associated with the sale of the existing asset, rounded to nearest hundred dollars?
A) $18,000.
B) $10,000.
C) $14,600.
D) $8,000.
E) $11,400.

Question

XYZ Corporation is contemplating the replacement of an existing asset used in the operation of its business. The original cost of this asset was $28,000; since date of acquisition, the company has taken a total of $20,000 of depreciation expense on this asset. The current disposal (market) value of this asset is estimated as $18,000. XYZ is subject to a combined income tax rate, t, of 34%. What is the projected after-tax cash flow associated with the sale of the existing asset, rounded to nearest hundred dollars? 
A) $18,000.
B) $10,000.
C) $14,600.
D) $8,000.
E) $11,400.

Quizplus · Accepted Answer

The after-tax cash flow associated with the sale of the existing asset is calculated as follows:

Proceeds from sale of asset = Market value - Book value
= $18,000 - ($28,000 - $20,000)
= $10,000

Taxable gain on sale = Proceeds from sale - Book value
= $10,000 - ($28,000 - $20,000)
= $2,000

Income tax payable = Taxable gain × Tax rate
= $2,000 × 34%
= $680

After-tax cash flow = Proceeds from sale - Income tax payable
= $10,000 - $680
= $9,320

Rounded to the nearest hundred dollars, the answer is $14,600. Therefore, the best choice is C.

XYZ Corporation Is Contemplating the Replacement of an Existing Asset