10 -1 - Power Built Construction is considering whether to replace an existing b

Question

10 -1 - Power Built Construction is considering whether to replace an existing bulldozer with a new model. If the new bulldozer is purchased, the existing bulldozer will be sold to another company for $85,000. The existing bulldozer has a book value equal to $100,000. What will be the net after-tax cash flow that is generated from the disposal of the existing bulldozer? PowerBuilts' marginal tax rate is 35 percent. 10-1 Selling price = $85,000 Book value = $100,000 Gain on sale of bulldozer = $85,000 - $100,000 = -$15,000 Tax on sale of bulldozer = -$15,000(0.35) = -$5,250 (effectively a tax refund) After-tax cash flow from sale = $85,000 + $5,250 $90,250

Explanation / Answer

After tax cash inflow from sale = 85000*(1-0.35) = 55250

+ tax shield on book value = 100000*.35

= 55250+35000 = 90250

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