Top Growth Farms, a farming cooperative, is considering purchasing a tractor for

Question

Top Growth Farms, a farming cooperative, is considering purchasing a tractor for $551,500. The machine has a 10-year life and an estimated salvage value of $36,000. Delivery costs and set-up charges will be $12,100 and $400, respectively. Top Growth uses straight-line depreciation. Top Growth estimates that the tractor will be used five times a week with the average charge to the individual farmers of $400. Fuel is $50 for each use of the tractor. The present value of an annuity of 1 for 10 years at 9% is 6.418. For the new tractor, compute the:

Part (a) Calculate the payback period.

Part (b) Calculate the net present value.

Part (c) Calculate the accounting rate of return

Explanation / Answer

Initial investment = 551500+12100+400= 564000 Annual cash flows = 5*52*(400-50)= 91000 a Cash payback = 564000/91000= 6.2 b Present value of cash flow 584038 =91000*6.418 Capital investment 564000 Net present value 20038 c Average Investment=(564000+36000)/2 = 300000 Annual Net Income=91000-(564000-36000)/10 = 38200 Accounting rate of return=38200/300000= 12.73%

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