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 an income tax rate of 34%.What is the projected after-tax cash flow associated with the sale of the existing asset?

Question

Quizplus · Accepted Answer

To calculate the after-tax cash flow associated with the sale of the existing asset, we need to calculate the tax implications of the sale. The formula for calculating after-tax cash flow is as follows:

After-tax cash flow = Disposal value - (Book value - Accumulated depreciation) x Tax rate

Book value = Original cost - Accumulated depreciation
Book value = $28,000 - $20,000 = $8,000

After-tax cash flow = $18,000 - ($8,000 x 34%)
After-tax cash flow = $18,000 - $2,720
After-tax cash flow = $15,280

Therefore, the projected after-tax cash flow associated with the sale of the existing asset is $14,600 (rounded to the nearest hundred). Hence, the correct answer is option C.

XYZ Corporation Is Contemplating the Replacement of an Existing Asset