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%. The farm owner uses the straight-line method of depreciation.
Calculate the following associated with replacing the tractor:
c) The Profitability Index
d) The Payback Period
e) Simple Rate of Return
PLEASE SHOW WORK