Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company's marginal tax rate is 40 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)?

Question

Quizplus · Accepted Answer

The loss on sale is $5,000 ($90,000 - $95,000), which provides a tax shield of $2,000 ($5,000 x 40%). The after-tax cash flow is the sale price plus the tax shield: $90,000 + $2,000 = $92,000.

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