Suppose you sell a fixed asset for $10,000 when its book value is $2,000. 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 after-tax cash flow of this sale is $7,200. This is calculated as follows:Sale price: $10,000Book value: $2,000Gain on sale: $8,000Taxes on gain: $8,000 x 35% = $2,800After-tax cash flow: $10,000 - $2,800 = $7,200

Suppose You Sell a Fixed Asset for $10,000 When Its