Question #2 A farm owner is considering replacing his obsolete tractor with one
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?
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
(Important Note: Must use the formulas and definitions provided in Ch. 13 of the textbook – NOT alternative methods provided on non-course websites!!)