Computing the terminal-year FCF: Babaloo Nightclubs purchased a disco mirror that currently has a book value of $10,000. If Babaloo sells the disco mirror for $500 today, then what is the amount of cash that it will net after taxes if the company is subject to a 39 percent company tax rate?

Question

Quizplus · Accepted Answer

The net cash received after selling the disco mirror would be calculated as follows:
Sales price = $500
Book value = $10,000
Loss on sale = ($9,500)
Taxable loss on sale = ($3,705) [($9,500) x 0.39]
Net cash received after taxes = $500 - ($3,705) = $4,205.
Therefore, the correct answer is C.

Computing the Terminal-Year FCF: Babaloo Nightclubs Purchased a Disco Mirror