can be sold for salvage of $42371. If the firm\'s corporate income tax rate is 1

Question

can be sold for salvage of $42371. If the firm's corporate income tax rate is 15 e cash flow resulting from the sale of the machine. Do not gnore the tax effect and, fnecessary, assume the cost of capital is 10%. Answer: Check Suppose that a machine with a book value of $35745 can be sold for salvage of $41937. If the firm's corporate income tax rate is 15 percent, what is the cash flow resulting from the sale of the machine. Do not ignore the tax effect and, if necessary, assume the cost of capital is 10%. Answer

Explanation / Answer

Book value of equipment = $46,949

Sale price = $42,371

Tax rate = 15%.

Since, sales price of equipment is less than book value, so no tax would be levied on sale of equipment, So before tax sales price would be equal to after tax sales price. So total cash flow from sale of equipment is equal to sale price that is $42,371.

b.

Book value of equipment = $35,745

Sale price = $41,937

Tax rate = 15%.

Since, sales price of equipment is more than book value, so tax would be levied on the excess sale value from book value of equipment.

After tax cash flow = $35,745 + ($41,937 - $35,745) × (1 - 15%)

= $35,745 + ($6,192 × 85%)

= $35,745 + $5,263.20

= $41,008.20.

After tax cash flow is $41,008.20.

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