If,at the end of the project life,a piece of equipment having a book value of $4,000 is expected to bring $3,000 upon resale,and the income tax rate is 40%,how much will be the cash flow?
A)$2,800
B)$3,000
C)$3,400
D)$4,000

Question

Quizplus · Accepted Answer

The cash flow would be the difference between the resale value and the tax on the gain from the sale. The gain from the sale is $3,000 - $4,000 = -$1,000 (a loss), but since the tax rate is 40%, the tax on the gain is -$1,000 * 0.4 = $400 (a negative number because it's a tax payment). Thus, the cash flow is $3,000 - $400 = $3,400.

If,at the End of the Project Life,a Piece of Equipment