Net Present Value A farmer is deciding whether or not to purchase a new tractor that has an expected life of 5 years. The tractor will reduce farming costs by $4,000 in the first year, $4,500 in the second year, $5,000 in the third year, $5,500 in the fourth year, and $6,000 in the 5th year. Assume that these cost savings are realized at the end of each year. Furthermore, the tractor would cost the farmer $20,000 to purchase today. a. If the annual interest rate is 7 percent, what is the farmer's net present value of purchasing the tractor? b. Would it be rational for the farmer to purchase the new tractor? Why or why not? Explain briefly in a few sentences.

Net Present Value A farmer is deciding whether or not to purchase a new tractor that has an expected life of 5 years. The tractor will reduce farming costs by $4,000 in the first year, $4,500 in the second year, $5,000 in the third year, $5,500 in the fourth year, and $6,000 in the 5th year. Assume that these cost savings are realized at the end of each year. Furthermore, the tractor would cost the farmer $20,000 to purchase today. a. If the annual interest rate is 7 percent, what is the farmer's net present value of purchasing the tractor? b. Would it be rational for the farmer to purchase the new tractor? Why or why not? Explain briefly in a few sentences.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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