Question

Company A is considering the purchase of a new machine.

The new machine is not expected to affect revenues, but pretax operating expenses will be reduced by $12,700 per year for 10 years.

The old machine is now 5 years old, with 10 years of its scheduled life remaining. It was originally purchased for $61,500 and has been depreciated by the straight-line method.

The old machine can be sold for $20,700 today

The new machine will be depreciated by the straight-line method over its 10-year life.

The corporate tax rate is 35 percent.

The firm’s required rate of return is 14 percent.

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

All other cash flows occur at year-end.

The market value of each machine at the end of its economic life is zero. Determine the break-even purchase price in terms of present value of the machine.

		41,000
		83,561.84
		77,533.79
		43,059.03

Answer 1