Homework Help Forum: economics

Posted by Christopher on Sunday, October 25, 2009 at 4:40pm.

Determine the highest purchase price that a company could afford to pay for the new harvester and still have a positive Net Present Value project. These are the facts: There is an 5 year old harvester with 10 years of life remaining, it was purchased for $54,000 and has been depreciated by the straight line method to a zero residual value. It could be sold for 36,000 today. The new harvester is not expected to affect revenues but before tax operating expenses will fall by $18,000 per year for 10 years. It will also be depreciated by the straight line method to a zero residual value in 10 years. The MARR is 12%, the marginal corporate tax rate is 30%, and is expected to stay that way. Captival gains and losses are taxed at the corporate rate of 15% when they are realized. HELP!!!

• economics - economyst, Monday, October 26, 2009 at 1:44pm

  Excel spreadsheets are very helpful for these kinds of problems. It seems to me, the firm has two options. Keep the existing harvester, in which case the sole economic benefit is the depreciation deduction. Or sell the existing harvester and pay a cap gains tax (including recapture), buy a new harvester for price P and reduce after-tax operating expenses by $18,000*(1.-t). Be sure to deflate each dollar value in future years to present values using the MARR. Find P such that both options are equivalent. Good luck.

  
  

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