Question
The Cornchopper Company is considering the purchase of a new harvester. Cornchopper has hired you to determine the break-even purchase price in terms of present
The Cornchopper Company is considering the purchase of a new harvester. Cornchopper 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 projects NPV is zero. Base your analysis on the following facts: The new harvester is not expected to affect revenues, but pretax operating expenses will be reduced by $9,000 per year for 10 years. The old harvester is now 5 years old, with 10 years of its scheduled life remaining. It was originally purchased for $67,000 and has been depreciated by the straight-line method. The old harvester can sold for $21,000 today. The new harvester will be depreciated by the straight-line method over its 10-year life. The corporate tax rate is 34%. The firms required rate of return is 13%. 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 zero. Calculate the financial break-even point.
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