Answer Happy

The Green Company is considering the purchase of a new
reaper. The new reaper is not expected to affect revenues, but
pretax operating expenses will be reduced by $12,000 per year for
10 years. The old reaper is now 5 years old, with 10 years of its
scheduled life remaining. It was originally purchased for $50,000
and has been depreciated by the straight-line method. The old
reaper can be sold for $18,000 today. The new reaper will be
depreciated by the straight-line method over its 10-year life. The
corporate tax rate is 34 percent. The firm’s required rate of
return is 15 percent. The initial investment, the proceeds from
selling the old reaper, and any resulting tax effects occur
immediately. All other cash flows occur at year-end. The market
value of each reaper at the end of its economic life is
zero.
Required:
1. The Green Company has hired you to determine the
break-even purchase price in terms of present value of the reaper.
This break-even purchase price is the price at which the project’s
NPV is zero. Base your analysis on the above facts. (4
marks)
2. Justify and explain your answer in details (1
mark)