Question

The Cornchopper Company is considering the purchase of a new harvester.

The new harvester is not expected to affect revenue, but operating expenses will be reduced by $14,300 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 $86,000 and 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-line method 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 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.

Answer 1

The break-even purchase price for the harvester is the price at which the project's NPV equals zero, considering operating expenses, tax effects, and depreciation.

Step-by-step explanation:

The break-even purchase price in terms of present value is the price at which the Net Present Value (NPV) of the harvester is zero. To calculate this, we must consider the difference in operating expenses, sale of the old harvester and the tax impact, and depreciation of the new harvester. Considering the Cornchopper Company's situation, here is a simplified breakdown of how to calculate the break-even price based on the information provided:

1. Calculate the after-tax savings from reduced operating expenses ($14,300 per year).
2. Determine the after-tax salvage value of the old harvester, which involves taking into account the tax effect of selling at $22,300.
3. Calculate the annual depreciation tax shield for the new harvester.
4. Discount all cash flows to present value using the firm's required rate of return of 14%.
5. Sum these present values to find the break-even purchase price.

Note that this calculation does not include the specifics of calculating taxes on the sale of the old harvester or the depreciation of the new one. For a complete answer, take those steps into consideration along with the corporate tax rate of 23%.