Negotiating the purchase of new piece of equipment

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Reference no: EM131816005

Company B is negotiating the purchase of a new piece of equipment. It wants to know the break - even price that it should be willing to pay for the equipment based on following data:

a. New equipment replacing existing equipment with current market value of $22k;

b. The new equipment which has a life of eight years will not affect revenues, but before-tax operating costs will be reduced by $12,000 per year for eight years, starting year 1.

c. The old equipment is now five years old. It is expected to last for another eight years, and is expected to have no resale value at the end of those eight years. It was purchased for $50,000 and is being depreciated to zero on a straight - line basis over 10 years. ?

d. The new equipment will be depreciated to zero using straight - line depreciation over five years, starting from Year 1. Company B expects to be able to sell the equipment for $5,500 at the end of eight years. ?Tax rate is 35%, Cost of Capital is 8%

Reference no: EM131816005

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