Changing machines in a world with taxes.

Assume that the Clampton Company in the previous question expects to pay income taxes of 40 percent and that a loss on the sale or disposal of equipment is treated as an ordinary deduction, resulting in a tax savings of 40 percent. The Clampton Company wants to earn 8 percent on its investment after taxes. Depreciation for tax purposes is computed on the straight-line method.

a. Should the company buy the equipment if the facts are otherwise as described in the scenario from the previous question?

b. Should the company buy the equipment if the facts are otherwise as described in the second scenario from the previous question?