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 9.00%.
MODEL A: Initial cost of $14,358.00, Yearly operating cost of $989.00 for 7.00 years. MODEL B: Initial cost of $12,718.00, Yearly operating cost of $1,581.00 for 9.00 years.
What is the NPV of buying tractor A?(HINT: This will be a negative number)
What is the NPV of buying project B? (HINT: The NPV will be negative)
We need a yearly cost of owning these tractors. What is the yearly cost of operating tractor A? (this will be a negative answer...)
What is the yearly cost of operating tractor B? (Hint: The answer will be negative)
Which tractor has the lower annual cost? (A or B)