The Cornchopper Company is considering the purchase of a new harvester. The new harvester is not expected...

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Finance

The Cornchopper Company is considering the purchase of a newharvester.
The new harvester is not expected to affect revenue, butoperating expenses will be reduced by $14,300 per year for 10years.
The old harvester is now 5 years old, with 10 years of itsscheduled life remaining. It was originally purchased for $86,000and has been depreciated by the straight-line method.
The old harvester can be sold for $22,300 today.
The new harvester will be depreciated by the straight-linemethod over its 10-year life.
The corporate tax rate is 23 percent.
The firm’s required rate of return is 14 percent.
The initial investment, the proceeds from selling the oldharvester, 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 economiclife is zero.

Determine the break-even purchase price in terms of presentvalue of the harvester. This break-even purchase price is the priceat which the project’s NPV is zero. (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.)

Purchase price $xxxxxxxxxxx

Answer & Explanation Solved by verified expert

3.6 Ratings (498 Votes)

First we need to do a few calculations about the existing and the new harvestor Harvester Old New Cost 86000 9601458216 Calculated using Excels goal seek Life 10 10 Age 5 5 Depreciation method SLM SLM Annual Depreciation 8600010 8600 9601458216 BV 860008600x543000 SP 22300 Profit 223004300020700 Tax Savings 023 x 207004761 As SP BV the sale of old harvester leads to a loss and therefore leads to a tax savings of 4761 at 23 tax rate Now let us calculate the NPV Particular Remark 0 1 2 3 4 5 6 7 8 See Answer

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The Cornchopper Company is considering the purchase of a newharvester.The new harvester is not expected to affect revenue, butoperating expenses will be reduced by $14,300 per year for 10years.The old harvester is now 5 years old, with 10 years of itsscheduled life remaining. It was originally purchased for $86,000and has been depreciated by the straight-line method.The old harvester can be sold for $22,300 today.The new harvester will be depreciated by the straight-linemethod over its 10-year life.The corporate tax rate is 23 percent.The firm’s required rate of return is 14 percent.The initial investment, the proceeds from selling the oldharvester, and any resulting tax effects occur immediately.All other cash flows occur at year-end.The market value of each harvester at the end of its economiclife is zero. Determine the break-even purchase price in terms of presentvalue of the harvester. This break-even purchase price is the priceat which the project’s NPV is zero. (Do not roundintermediate calculations and round your answer to 2 decimalplaces, e.g., 32.16.) Purchase price$xxxxxxxxxxx