Financial Break-even The Wheatchopper Company is considering the purchase of a new harvester. Wheatchopper has hired you

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Financial Break-even The Wheatchopper Company is considering the purchase of a new harvester.

Wheatchopper has hired you to determine the break-even purchase price in terms of present value of the harvester. This break-even purchase price is the price at which the project’s NPV is zero. Base your analysis on the following facts:

• The new harvester is not expected to affect revenues, but pre-tax operating expenses will be reduced by €10,000 per year for 10 years.

• The old harvester is now five years old, with 10 years of its scheduled life remaining. It was originally purchased for €45,000 and has been depreciated using the 20 per cent reducing balance method.

• The old harvester can be sold for €20,000 today.

• The new harvester will be depreciated by the 20 per cent reducing balance method over its 10-year life.

• The corporate tax rate is 34 per cent.

• The firm’s required rate of return is 15 per cent.

• The initial investment, the proceeds from selling the old harvester and any resulting tax effects occur immediately.

• All other cash flows occur at year-end.

• The market value of each harvester at the end of its economic life is equal to its residual or written down value.

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Corporate Finance

ISBN: 9781526848093

4th Edition

Authors: David Hillier

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