The Kings Inn Resort purchased three delivery carts 5 years ago. The delivery carts initially cost $60,000 and are depreciated on a straight line basis over 10 years. The effective tax rate for the company is 40%. Part A: What is the net cash flow if they sell the used carts for $36,000?Part B: What are the net cash flows if they sell the used carts for $30,000?Part C: What is the net cash flow if they sell the used carts for $25,000

Answered: The Kings Inn Resort purchased three…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter12: Capital Budgeting: Decision Criteria

Section: Chapter Questions

Problem 22P: The Scampini Supplies Company recently purchased a new delivery truck. The new truck cost $22,500,...

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Question

The Kings Inn Resort purchased three delivery carts 5 years ago. The delivery carts initially cost $60,000 and are depreciated on a straight line basis over 10 years. The effective tax rate for the company is 40%.

Part A: What is the net cash flow if they sell the used carts for $36,000?
Part B: What are the net cash flows if they sell the used carts for $30,000?
Part C: What is the net cash flow if they sell the used carts for $25,000

Expert Solution

Introduction

Net proceeds from sale of an asset is the proceeds as adjusted by the tax effects. In case there is a gain on sale of asset then such gain would be subject to capital gain tax and net proceeds would be proceeds minus tax.

Similarly, in case there is a loss on sale, there would be tax saving and net proceeds would be proceeds plus tax savings.

Gain on Sale

Computation of net proceeds:

Thus, net proceeds are $33,600.

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