30. 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 revenue, 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 22 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.
30. 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 revenue, 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 22 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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Financial Break Even - How do I go about answering this question
Transcribed Image Text:30. 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 revenue, 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 22 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.
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