1) Allen Air Lines should liquidate some equipment which is being replaced. Equipment originally cost $12 million, of which 75% has been depreciated. The used equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment’s after-tax net salvage value?
2) Although Chen Company’s milling machine is old, it is still in relatively good working order and would last for another ten years. Although It is incompetent compared to modern standards, and so company is considering replacing it. New milling machine, at the cost of $110,000 delivered and installed, would also last for ten years and would create after-tax cash flows (labour savings and depreciation tax savings) of $19,000 per year. It would have 0 salvage value at the ending of its life. The firm’s WACC is= 10%, and its marginal tax rate is= 35%. Should Chen buy the new machine?
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