Question

A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs by $2,000 in the first year, $2,500 in the second and $3,000 in the third and final year of usefulness. The tractor costs $9,000 today, while the above cost savings will be realized at the end of each year. If the interest rate is seven percent, what is the net present value of purchasing the tractor?

Answer 1

Answer:

We have a value of 16,500$

Explanation:

When supply curve is upward sioping, its slope is positive as there is a direct relationship between the price and quantity supplied. So, upward sloping shows a positive effect in order to supply.

Hope it help for a little:):-

Answer 2

The net present value of purchasing the tractor is $ -2498

Given:

Reduction of Cost by tractor in the first year = $2,000

Reduction of Cost by tractor in the second year = $2,500

Reduction of Cost by tractor in the third year = $3,000

Cost of the Tractor = $9,000

Interest Rate = 7%

To Find:

Net present value of purchasing the tractor

Solution:

Utilising the formula for PV of total cash inflows

= C/ (1 +r)^n

Where -

1. C is the cash flows
2. N is the time period and
3. r is the interest rate.

Substituting the values -

PV = 2000/1.07 + 2500/ (1.07)² + 3000/ (1.07)³

= 6502

Now, the cost of the tractor is = 9000

Therefore,

Net present value = PV of total cash inflows - The initial cost

= 6502 - 9000

= -2498

The NPV here is negative, thus it is not feasible to buy the tractor.

Answer: The net present value of purchasing the tractor is $ -2498

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