An owner of a large ranch is considering the purchase of a tractor with a front-end loader to clean his corrals instead of hiring workers that do it with a pitch fork. He has given you the following information and has asked you to evaluate this investment. The equipment costs $40,000. The rancher expects that he will save $11,500 a year that is usually paid to workers that clean out the corral by hand. However, he will incur an additional cost of $1,000 for fuel, repairs and maintenance. The rancher plans on keeping the equipment for 3 years before replacing it with a new one. He thinks he can sell the old equipment for $25,000 in three years. The rancher anticipates that his marginal tax rate will be 20 percent over the next three years. The IRS will allow the rancher to depreciate the tractor over seven years using the straight-line method. The rancher requires at least a 15% pretax rate of return on capital (pretax).
- What is the present value of the after-tax net returns?
- What is the present value tax savings from depreciation?
- What is the present value of after-tax terminal value?
- What is the Net Present Value?
- What is the maximum fuel, repairs and maintenance cost that can be paid each year to operate the loader and still find this investment profitable?
- A table showing the relationship between the NPV and operating expenses shows a downward sloping curve?