[TimF889]

I feel like I am having a brain fart getting my cost of capital and discount rates all messed up and for some reason I cannot understand how to do this question. If any one could answer this or guide me that would be AMAZING thanks so so so much!!

I really don’t think it’s a difficult quesiton but anyways….

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 owner’s Cost of Capital is 10%.

[TimF889]

Sorry forgot to add:

The questions regarding this informaiton are:

1) Calculate the Net Present Value of replacing the tractor

2) Based on this method of comparison, would you recommend replacing the tractor and why?

[acamp]

NPV of $23K per year savings using a 10% discount rate.

Compare this to the purchase price less the cash received from the old tractor ($115K).

If the NPV > $115K, DO IT!

(I think, its been a while lol)

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[KNCPA]

So I only started this study 2.5 weeks ago and really haven't hit a whole lot of this specific Time value of money portion; however, from my understanding of studies – the discount rate is the minimum rate accepted for an investment which is normally the cost of capital. Therefore, the “Discount Rate” or “Cost of Capital” would be the 10%.

NPV = (PV of Future Cash Flows) – (Initial Investment Outlay)

Since it doesn't specifically say so – i would assume depreciation isn't applicable to this particular problem.

The PV of Future Cash Flows (I think) would be PV of ord annuity (so using the 10% cost of capital at 10 years) it would be 6.144. So 23,000 (the cost savings per year) x 6.144 = 141,312.

To find the NPV it would be 141,312 – 125,000 = 16,312. 16,312 > 10,000 (sale price of old asset) – so I would say yes its recommended to replace tractor.

As stated, I'm still freshly studying in the TVM area — so I would wait to see if people agree or disagree with what i just did..

[KNCPA]

I just realized I may have mis-read the question haha but I'll leave the above post to see what others think

[Hello2016]

I think acamp is correct, but I don't remember the formula, but you can use your calculator or google the formula.

[Author]

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