Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your company's marginal tax rate is 35 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 asset is sold at a loss of $5,000 ($80,000 - $75,000). This loss provides a tax shield of $1,750 ($5,000 * 35%). The after-tax cash flow is the sale price plus the tax shield: $75,000 + $1,750 = $76,750.

Suppose You Sell a Fixed Asset for $75,000 When Its