Question #2 (covered in Chapter 13)

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 owners 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?