7.21 Majestic Mining Company (MMC) is negotiating for the purchase of a new piece of equipment for their current operations. MMC wants to know the maximum price that it should be willing to pay for the equipment. That is, how high must the price be for the equipment to have an NPV of zero? You are given the following facts:

a. The new equipment would replace existing equipment that has a current market value of $20,000.

b. The new equipment would not affect revenues, but before-tax operating costs would be reduced by $10,000 per year for eight years. These savings in cost would occur at year-end.

c. The old equipment is now five years old. It is expected to last for another eight years, and it is expected to have no resale value at the end of those eight years. It was purchased for

$40,000 and is being depreciated to zero on a straight-line basis over 10 years.

d. The new equipment will be depreciated to zero using straight-line depreciation over five years. MMC expects to be able to sell the equipment for $5,000 at the end of eight years. The proceeds from this sale would be subject to taxes at the ordinary corporate income tax rate of 34 percent.

e. MMC has profitable ongoing operations.

f. The appropriate discount rate is 8 percent.