$3)$ Decision Making and Relevant Information $(16$ marks total$)$

Jack is a farmer who is considering replacing his existing tractor with a new high$-$end tractor because his neighbour told him it would save him money in the long$-$term. Jack doesn't think there is anything wrong with his current tractor so he's not sure whether to believe his neighbour. Jack was able to provide you with the following information and is seeking your expert advice on whether to replace his tractor with a new one. Since there is nothing wrong with Jack's current tractor, he believes he can sell it today if he buys the new tractor.

Current Tractor New Tractor

Original cost $$105,000$ $$50,250$

Accumulated depreciation $$5,250$ $$-$

Disposal value today $$82,500$ N$/$A

Remaining useful life $5$ years $5$ years

Annual operating expenses $$15,000$ $$12,750$

Salvage value in $5$ years $$-$ $$-$

Required:

a$)$ Identify the sunk costs. $(2$ marks$)$

b$)$ Identify the relevant costs. $(3$ marks$)$

c$)$ What are the cash flows under both scenarios, i$.$e$.$ if Jack keeps his current tractor vs$.$ buying the new tractor? $(9$ marks$)$

d$)$ Which option would you recommend to Jack and why? $(2$ marks$)$