A project lasted several months and at the end of the project life, a piece of specialized equipment having a book value of $4,000 is expected to bring $3,000 upon resale, and the income tax rate is 40%, how much will be the cash flow?
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To calculate the cash flow at the end of the project, we need to consider the initial cost of the equipment, the expected resale amount, and the income tax rate.
First, let's determine the initial cost of the equipment. Since it is mentioned that the equipment has a book value of $4,000, we can assume that this is the initial cost.
Next, we need to calculate the taxable income from the sale of the equipment. The taxable income is the difference between the resale amount and the book value. In this case, it is $3,000 - $4,000 = -$1,000.
Since the taxable income is negative, it means that there is a loss on the sale of the equipment. This loss will be used to offset any taxable income from other sources.
Now, we can calculate the income tax on this loss. The income tax equals the taxable income multiplied by the income tax rate. In this case, it is -$1,000 * 40% = -$400.
Finally, we can calculate the cash flow by subtracting the income tax from the resale amount. It is $3,000 - $400 = $2,600.
Therefore, the cash flow at the end of the project will be $2,600.