Question

The Cornchopper Company is considering the purchase of a new harvester.

The new harvester is not expected to affect revenues, but pretax operating expenses will be reduced by $12,100 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 $52,500 and has been depreciated by the straight-line method. The old harvester can be sold for $20,100 today. The new harvester will be depreciated by the straight-line method over its 10-year life. The corporate tax rate is 24 percent. The firm’s required rate of return is 14 percent. 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.

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.

Answer 1