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# Question #2 (covered in Chapter 13) A farm owner is considering replacing his obsolete tractor with one of two new state-of-the-tractors.

**Question #2 (covered in Chapter 13)**

**A farm owner is considering replacing his obsolete tractor with one of two new state-of-the-tractors. This new machine would cost $125,000 and would have a ten-year useful life. Unfortunately, the new machine would have no salvage value but would result in annual cost savings of $23,000 per year. The current old tractor can be sold now for $10,000. The farm owner's Cost of Capital is 10%. The farm owner uses the straight line method of depreciation (this depreciation information is needed only for calculating the "Simple Rate of Return" in Question #3).**

**a.) Calculate the Net Present Value of replacing the tractor .**

**b.) Based on this method of comparison, would you recommend replacing the tractor? Why?**

**Question #3 (covered in Chapter 13)**

**Based on the above information for Question #2 and your solution to that question, **

**calculate the following associated with replacing the tractor:**

**c.) The Profitability Index**

**d.) The Payback Period**

**e.) Simple Rate of Return**

**(Important Note: Must use the formulas and definitions provided in Ch. 13 of the textbook - NOT alternative methods provided on non-course websites!!)**