An owner of a large ranch is considering the purchase of a tractor with a front-end loader to clean his corrals instead of hiring workers that do it with a pitch fork. He has given you the following information and has asked you to evaluate this investment.  The equipment costs $40,000.  The rancher expects that he will save $11,500 a year that is usually paid to workers that clean out the corral by hand.  However, he will incur an additional cost of $1,000 for fuel, repairs and maintenance.  The rancher plans on keeping the equipment for 3 years before replacing it with a new one. He thinks he can sell the old equipment for $25,000 in three years.  The rancher anticipates that his marginal tax rate will be 20 percent over the next three years.  The IRS will allow the rancher to depreciate the tractor over seven years using the straight-line method.  The rancher requires at least a 15% pretax rate of return on capital (pretax).  

A.         Layout the cash flow for the investment.

B.          Calculate the net present value (NPV=410) and indicate if the investment is profitable.

C.             What is the maximum fuel, repairs and maintenance cost that can be paid each year to operate the loader and still find this investment profitable?

D.            Use Excel to make table showing the relationship between the NPV and operating expense.  Use Excel to graph this relationship.  Make sure all axis and lines are labeled correctly

Answer rating: 100% (QA)

A Cash Flow for the Investment To calculate the cash flows for the investment we need to consider the initial cost of the equipment the annual savings ... View the full answer