The Cornchopper Company is considering the purchase of a new harvester. The new
ID: 2774832 • Letter: T
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 $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 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. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
The Cornchopper Company is considering the purchase of a new harvester.
Explanation / Answer
Depreciation and Book Value Calculations
Old Equipment:
Depreciation =
Book Value = 65,000 – (5)(4333.33) = 43333.35
New Equipment:
Depreciation = = 0.1PriceBE
Initial Investment:
New Equip:
-PriceBE
Old Equip:
36193.35
=21000 – 0.34(21000 – 43333.35)
CF0 =
-PriceBE + 36193.35
OCF:
OCF = (13,000)(1 – 0.34) + (.1PriceBE – 4333.33)(0.34)
= (13,000)(0.66) + 0.034PriceBE - 1,473.33
= 7106.67 + 0.034PriceBE
Non Operating Cash Flow:
Salvage Vvalue = 0
Net Working Capital = 0
Total = 0
Therefore by using NPV formula
0 = -PriceBE + 36193.35 + (7106.67 + 0.034PriceBE)(PVIFA10,15%)
PriceBE = 36193.35 + (7106.67)( PVIFA10,15%) + (.034PriceBE)(PVIFA10,15%)
PriceBE = 36193.35 + (7106.67)( PVIFA10,15%) + PriceBE[(.034)(PVIFA10,15%)]
N
10
N
10
I
15%
I
15%
Calculated PV
35666.73
Calculated PV
0.1706
Pmt
7106.67
Pmt
0.034
FV
0
FV
0
PriceBE = 36193.35 + 35666.73 + 0.1706PriceBE
0.8294PriceBE = 71860.08
PriceBE = 86641.04
New Equip:
-PriceBE
Old Equip:
36193.35
=21000 – 0.34(21000 – 43333.35)
CF0 =
-PriceBE + 36193.35
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