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Notice that we have also computed the book value of the system as of the end of each year. The book value at the end of Year 4 is $27,648. If Staple sells the system for $10,000 at that time, it will have a loss of $17,648 (the difference) for tax purposes. This loss, of course, is like depreciation because it isn't a cash expense.

What really happens? Two things. First, Staple gets $10,000 from the buyer. Second, it saves .34 X $17,648 = $6,000 in taxes. So the total aftertax cash flow from the sale is a $16,000 cash inflow.

14The rules are different and more complicated with real property. Essentially, in this case, only the difference between the actual book value and the book value that would have existed if straight-line depreciation had been used is recaptured. Anything above the straight-line book value is considered a capital gain.

CHAPTER 10 Making Capital Investment Decisions 325

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