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Net present value of purchasing the tractor

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Use the present or future value formulas given in Chapter 1 to answer the following problems:

a. If the interest rate is 10 percent and cash flows are $1,000 at the end of year one and $2,000 at the end of year two, calculate the present value of these cash flows.

b. A firm will have constant profits of $100,000 per year for the next four years, and the interest rate is 6 percent. Assuming these profits are realized at the end of each year, what is the present value of these future profits?

c. Suppose the interest rate is 5 percent, the expected growth rate of the firm is 2 percent, and the firm is expected to continue forever. If current profits are $1,000, what is the value of the firm?

d. A farm must decide whether or not to purchase a new tractor. The tractor will reduce costs by $2,000 in the first year, $2,500 in the second, and $3,000 in the third and final year of usefulness. The tractor costs $9,000 today, while the above cost savings will be realized at the end of each year. If the interest rate is 7 percent, what is the net present value of purchasing the tractor?

Reference no: EM132168909

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