A farm owner is considering replacing his obsolete tractor with one of two new s

Question

A farm owner is considering replacing his obsolete tractor with one of two new state-of-the-tractors. This new machine would cost $125,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value but would result in annual cost savings of $23,000 per year. The current old tractor can be sold now for $10,000. The farm owner’s Cost of Capital is 10%. The farm owner uses the straight-line method of depreciation (this depreciation information is needed only for calculating the “Simple Rate of Return” in Question #3)

. a.) Calculate the Net Present Value of replacing the tractor.

b.) Based on this method of comparison, would you recommend replacing the tractor? Why?

Question #3 (covered in Chapter 13) Based on the above information for Question #2 and your solution to that question, calculate the following associated with replacing the tractor:

c.) The Profitability Index

d.) The Payback Period

e.) Simple Rate of Return

Please show work for both questions. Thank you.

Explanation / Answer

Q.2.

NPV is calculated in the given table:

b) As you can see in part a that NPV is positive thus replacing the tractor is efficient. Far,er should go for replacing.

Note: kindly post one queation at a time.

Cash Flow PV at 10% PV of cash flow 10000 1 10000 -125000 1 -125000 23000 0.909090909 20909.09091 23000 0.826446281 19008.26446 23000 0.751314801 17280.24042 23000 0.683013455 15709.30947 23000 0.620921323 14281.19043 23000 0.56447393 12982.90039 23000 0.513158118 11802.63672 23000 0.46650738 10729.66974 23000 0.424097618 9754.245223 23000 0.385543289 8867.495657 NPV 26325.04343

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