Problem:
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 10,000$ 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 45,000$ and has been depreciated by the straight line method.
The old harvester can be sold for 20,000$ today
The new harvester will be depreciated by the straight line method over it's 10 year life.
The corporate tax rate is 34%.
The firms required rate of return is 15%.
The initial investment, the proceeds from selling the old harvester, and any resulting tax effects occur immediately. Capital gains and losses are taxed at the corporate rate of 34% when they are realized.
All other cash flows occur at year end.
The market value of each harvester at the end of its economic life is zero.