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# Break-Even Price Calculation: Example Question

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Firm AAA that is considering the purchase of a new machine. They have asked you to arrive to a break-even price, so that the NPV of the entire operation would be equal to zero. The new machine is expected to produce the following effects:

Operating expenses will be reduced by \$12,000 per year for 10 years;

The existing machine is 5 years old and has 10 years of its scheduled life remaining. It was purchased for \$45,000 and depreciated on a straight line basis over 15 years. Its salvage value was supposed to be zero at the end of its usage. It has a current market value of \$35,000;

The new machine will be depreciated straight-line over its 10 years of life. Salvage value is expected to be \$8,000.
The corporate tax rate is 35% and the cost of capital for the firm is 15%. Assume that all capital gains are taxable, while all capital losses are tax deductible.