Dairy Ltd runs a highly successful dairy farm in the heart of the Golden Vale. The tractor
Question:
Dairy Ltd runs a highly successful dairy farm in the heart of the Golden Vale. The tractor which is used to work the land is at the stage where it is causing a lot of problems and spends most of its time with the mechanic. Dairy Ltd is planning on replacing the tractor and has to decide between two models, a two-wheel drive and a four-wheel drive. To avoid a reoccurrence of the problems they are currently experiencing with the existing tractor, Dairy Ltd has decided to replace the new tractor at the end of the fourth year. The incremental cash flow for the purchase of the new tractors has been calculated as follows:
Two-wheel | Four-wheel | |
Net cash inflows: | € | € |
Year 0 | -95,600 | -125,000 |
Year 0 (sale of old tractor) | 12,000 | 12,000 |
Year 1 | 10,000 | 11,000 |
Year 2 | 25,000 | 22,000 |
Year 3 | 48,000 | 96,000 |
Year 4 | 3,000 | -8,000 |
Year 4 (sale of new tractor) | 25,000 | 33,000 |
The following is the present value of €1:
PRESENT VALUE OF €1 | 10% | 12% |
Year 1 | 0.909 | 0.893 |
Year 2 | 0.826 | 0.797 |
Year 3 | 0.751 | 0.712 |
Year 4 | 0.683 | 0.636 |
whhich tractor should Dairy Ltd purchase using the net present value investment appraisal method?
Expert Answer:
ANSWER To determine which tractor Dairy Ltd should purchase using the net present value NPV investme... View the full answer
