3. Swift Airlines must liquidate some equipment that is being replaced. The equi

Question

3. Swift Airlines must liquidate some equipment that is being replaced. The equipment originally cost $12 million, of which 75% has been depreciated. The equipment can be sold today for $4 million, and its tax rate is 40%. What is the equipment's after-tax salvage value? 4. Although the Carlisle Company's milling machine is old, it is still in relatively good working order and would last for another 10 years. It is inefficient compared to modern standards, though, and so the company is considering replacing it. The new milling machine, at a cost of $110,000 delivered and installed, would also last for 10 years and would produce after-tax cash flows (labor savings and depreciation tax savings) of $19,000 per year. It would have zero salvage value at the end of its life. The firm's WACC is 10%, and its marginal tax rate is 35 Should Carlisle buy the new machine? Explain your answer.

Explanation / Answer

After tax Salvage value Cost 12000000 Depreciation 9000000 12000000*75% Carrying Value 3000000 Sold 4000000 Profit 1000000 Tax@ 40% 400000 Net Profit 600000 After Tax Salvage Value = 30000000(1-.4) 1800000

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