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the choice of alternatives using both the Annual Worth and Present Worth approaches.

the choice of alternatives using both the Annual Worth and Present Worth approaches.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A farmer is evaluating the purchase of a new tractor vs. a used tractor. The new tractor has an initial cost of $75,000, a useful life of 18 years, maintenance cost of $2100 per year, salvage value of $20,000. The used tractor costs $25,000 initially, a useful life of nine years, salvage value of $8000, and maintenance cost of $3000 per year. Evaluate the choice of alternatives using both the Annual Worth and Present Worth approaches. Use an interest rate of 8% per year.
Transcribed Image Text:A farmer is evaluating the purchase of a new tractor vs. a used tractor. The new tractor has an initial cost of $75,000, a useful life of 18 years, maintenance cost of $2100 per year, salvage value of $20,000. The used tractor costs $25,000 initially, a useful life of nine years, salvage value of $8000, and maintenance cost of $3000 per year. Evaluate the choice of alternatives using both the Annual Worth and Present Worth approaches. Use an interest rate of 8% per year.
Expert Solution
Step 1

Present Worth is the present value of all costs incurred over the useful period of life.

Annual Worth =Net Present ValuePVAF (Kc,n)PVAF = Present Value of Annuity FactorKc=Cost of Capital or Interest Raten = No. of Period

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