US CMA Part 2 · Chapter 8 · Question 10 of 15
At the end of a project, equipment with a tax basis of $0 will be sold for $50,000, and the $60,000 of net working capital invested at the start will be fully recovered. The tax rate is 25%. What is the total terminal-year non-operating cash flow?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) $97,500
Explanation
Gain on sale = $50,000 - $0 = $50,000, so tax = $50,000 x 25% = $12,500 and after-tax salvage = $37,500. Recovery of working capital is not taxable: $60,000. Terminal cash flow = $37,500 + $60,000 = $97,500.
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