economics
posted by Christopher .
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!!!

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 aftertax 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.
Respond to this Question
Similar Questions

Financial management
evaluates investment opportunities using payback. The finance director who has been with the company since its formation in 1975, has recently heard that this method may not be the best for evaluating long term projects. You have been … 
Finance
What's the net present value (NPV) of this replacement project? 
Business
What is the net present value (NPV) of this replacement project? 
college
A company is considering the purchase of a forest that is estimated to yield an annual return of $50,000 for 10 years, after which the forest will have no value. The company wants to earn 8% on its investment and set up a sinking fund … 
strategic ffinancial mangement
XYZ company is contemplating the purchase of a new machinery costing rupees 30000with an expected life of 5 year at the end of which period , it can be solved for rupees 750 thousand in replacement of an old machine purchased 3 years … 
Finance math
Consider the project with the following expected cash flows: Year Cash flow 0 $400,000 1 $100,000 2 $120,000 3 $850,000 •If the discount rate is 0%, what is the project's net present value? 
Cooperate Finance
As the investment analyst for King breweries you are required to analyze the automated loom system in the Castle larger production line. The old system was purchased 5 years ago for $200,000. It falls in the accelerated cost recovery … 
Math  NPV & IRR
East Coast Television is considering a project with an initial outlay of $X ( you will have to determine this amount) It is expected that the project will produce a positive cash flow of $60,000 a year at the end of each year for the … 
Math
A manufacturing company is thinking of launching a new product. The company expects to sell $950,000 of the new product in the first year and $1,500,000 each year thereafter. Direct costs including labor and materials will be 45% of … 
Corporate Finance
I have answered all of the following except for the payback period, I do not understand how to do it. Can you please explain how to do the payback period?