- Question B Ari 5 Marks The Green Company Is Considering The Purchase Of A New Reaper The New Reaper Is Not Expected 1 (55.53 KiB) Viewed 76 times
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Question B (ARI: 5 Marks] 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 retum is 15 percent. The initial investment, the proceeds from selling the old reaper, and any resulting tax effects occur immediately. A11 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) Answer: