a) A lawn service company uses a low-end mower for their yards. The mower costs $2,000.00 initially, and then has an annual cost of $300.00 for gasoline and servicing. The company uses the mower for three years and then replaces with an identical model. The company has a 12.00% desired return on their investments.
What is the equivalent annual cost for the mower? (express as a negative)
b) A farmer is considering two different tractors for his business. Each tractor has a different price but also a different life span. The farmer will have to replace either tractor at the end of its useful life and start again. We will assume that the farmer has a discount rate of 10.00%.
MODEL A: Initial cost of $14,003.00, Yearly operating cost of $908.00 for 8.00 years. MODEL B: Initial cost of $12,010.00, Yearly operating cost of $1,532.00 for 9.00 years.
What is the NPV of buying tractor A? (HINT: This will be a negative number)