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.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 7EA: A mini-mart needs a new freezer and the initial Investment will cost $300,000. Incremental revenues,...

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A company planning to market a new model of motor scooter analyzes the effect of changes in the selling price of the motor scooter, the number of units that will be sold, and the cost of making the motor scooter on the estimated net present value (NPV) of the project. They predict that the break-even point for sales price for the motor scooter is $2,480. What does this mean? O If the motor scooter is sold for $2,480, then the project will make a profit. The net present value (NPV) of the project equals to zero at the sale price of the motor scooter equal to $2,480. O At the price of $2,480, the revenue for the scooter will exactly equal its production cost. O The predicted selling price of the motor scooter is $2,480. O The maximum that the motor scooter can sell for and still make the project have a positive net present value (NPV) is $2,480.
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