8)Suppose you sell a fixed asset for $50,000 when its book value is $60,000. If
ID: 2750981 • Letter: 8
Question
8)Suppose you sell a fixed asset for $50,000 when its book value is $60,000. If your company's marginal tax rate is 40%, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?
9)Your company has spent $500,000 on research to develop a new computer game. The firm is planning to spend $100,000 on a machine to produce the new game. Shipping and installation costs of the machine will be capitalized and depreciated; they total $5,000. The machine has an expected life of 3 years, a $100,000 estimated resale value, and falls under the MACRS 5-Year class life. Revenue from the new game is expected to be $500,000 per year, with costs of $200,000 per year. The firm has a tax rate of 35 percent, an opportunity cost of capital of 10 percent, and it expects net working capital to increase by $100,000 at the beginning of the project. What will be the net cash flow for year one of this project?
Sales $500,000
Fixed Costs - 200,000
Depreciation - 21,000
EBIT $279,000
Taxes - 97,650
Net Income $181,350
Depreciation 21,000
Cash Flow $202,350
Explanation / Answer
8.
sale proceeds = $50,000
book value = $60,000
Loss= $ 10,000
Marginal tax saving @ 40% = $4,000
After-tax cash flow = $ 54000
9)
Sales = $500,000
Less= Fixed Costs = 200,000
Less= Depreciation = 21,000
EBIT $279,000
Less= Taxes = 97,650
Net Income = $181,350
Add = Depreciation 21,000
Cash Flow = $202,350
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