The Cornchopper Company is considering the purchase of a new harvester. The company is currently involved in deliberations with the manufacturer and the parties have not come to settlement regarding the final purchase price. The management of Cornchopper has hired you to determine the break-even purchase price of the harvester. This price is that which will make the NPV of the project zero. Base your analysis on the following facts:

• The new harvester is not expected to affect revenues, but 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 purchased for $45,000. It has been depreciated on a straight-line basis.

• The old harvester has a current market value of $20,000.

• The new harvester will be depreciated on a straight-line basis over its 10-year life.

• The corporate tax rate is 34 percent.

• The firm’s required rate of return is 15 percent.

• All cash flows occur at year-end. However, the initial investment, the proceeds from selling the old harvester, and any tax effects will occur immediately. Capital gains and losses are taxed at the corporate rate of 34 percent when they are realized.

• The expected market value of both harvesters at the end of their economic lives is zero.

Scenario Analysis