Chapter 7, Problem 30QP

Financial Break-Even 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 project’s 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 $13,000 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 $65,000 and has been depreciated by the straight-line method.
• The old harvester can be 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 percent.
• The firm’s required rate of return is 15 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.