Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your company's marginal tax rate is 21 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)?
A) $5,000
B) $48,750
C) $76,050
D) $75,000

Question

Quizplus · Accepted Answer

The loss on the sale of the asset is $5,000 ($80,000 book value - $75,000 sale price). This loss reduces taxable income, leading to a tax shield of $1,050 ($5,000 loss * 21% tax rate). The after-tax cash flow from the sale is the sale price plus the tax shield, which equals $76,050 ($75,000 + $1,050).

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