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 seven percent, what is the net present value of purchasing the tractor?
A)$6,764.
B)$9,362.
C)$18,362.
D)none of the statements associated with this question are correct.

Question

Quizplus · Accepted Answer

The net present value (NPV) is calculated by discounting the future cash flows to their present value and subtracting the initial investment. The NPV calculation is as follows: NPV = -$9,000 + ($2,000 / (1+0.07)^1) + ($2,500 / (1+0.07)^2) + ($3,000 / (1+0.07)^3). Calculating this gives an NPV of approximately -$1,130, which is not listed among the options.

A Farm Must Decide Whether or Not to Purchase a New