Question

A farmer has a choice of purchasing three tractors. Tractor A costs $20,000, Tractor B costs $22,000 and Tractor C costs $25,000. Each tractor has different benefits, as stated below. If the farmer's Minimum Attractive Rate of Return (MARR) is 10%, what is the NPV of the most economic plan? Do a pre-tax analysis using NPV. Tractor A: Benefits of $5,010 per year for 5 years Tractor B: Benefits of $4,000 per year for 4 years and $16,000 at end of 5 years Tractor C: No benefits for 2 years, then benefits of $13,000 per year for 3 years

Problem 8: Tractors A and C have no salvage value, but Tractor B may have some salvage value after five years. How much would the salvage value of Tractor B need to be to make it the most economic alternative?

Answer 1

Answer (a) NPV Net Cash Flows Present Value PV factor @ 1096 P/F, 10%,n Year Tractor A Tractor B Tractor C Tractor A Tractor B Tractor C 0-$20,000 1 $5,010 2$5,010 3 $5,010 4$5,010 5$5,010 $5,050 $22,000 $4,000 $4,000 $4,000 $4,000 $16,000 $10,000 $25,000 $0 $0 $13,000 $13,000 $13,000 $14,000 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 (F)-В"E $20,000 $4,555 $4,140 $3,764 $3,422 $3,111 $1,008 (G)-CFE $22,000 $3,636 $3,306 $3,005 $2,732 $9,935 $614 H)-D*E $25,000 $0 $0 $9,767 $8,879 $8,072 $1,718 Most Economic Plan Tractor C, NPV of Tractor C - $1,718 Answer (b) How much would the salvage value of Tractor B need to be to make it the most economic alternative? To be Most Economic alternative, NPV must be Higher than NPV of Tractor C i.e NPV of $1,718 Let's assume NPV of $1,720 $1,720 $1,720 $1,105.80 $1,780.90 Salavage Value (P/F, 10%,5) 0.6209 NPV of Tractor B $614 Salavage Value Salavage Value $1,780.90 Salavage Value Salavage Value 0.6209 Approx. Formula for PV Factor Single payment present worth factor | Moves a single payment to NN periods earlier in time (PEİN)