Crosson Corporation recently sold a used machine for $40,000.The machine had a book value of $60,000 at the time of the sale.What is the after-tax cash flow from the sale,assuming the company's marginal tax rate is 20 percent?

Question

Quizplus · Accepted Answer

The company's gain or loss on the sale is the difference between the sale price and the book value: 
$40,000 sale price - $60,000 book value = -$20,000 loss

Since the company incurred a loss on the sale, it can be used to reduce its taxable income, resulting in tax savings. The tax savings can be calculated as: 
$20,000 loss x 20% tax rate = $4,000

Therefore, the after-tax cash flow from the sale is: 
$40,000 sale price + $4,000 tax savings = $44,000

Crosson Corporation Recently Sold a Used Machine for $40,000