Question

the management of flasher is trying to decide whether to buy a new team of mules at a cost of $1.000 or a new tractor at a cost of $10.000 they will perform the same job but because the mules require more laborers the annual return ıs only $250 of net cash ınflows the tractor will return $2.000 of net cash ınflows per year the mules have a working life of 8 years and the tractor has aworking life of 10 years neither ınvestment is expected to have a salvage value at the end of its useful life flesher farms desired rate of return is %6 Should firm buy mules or tractor? Please compare 2 options based on NPV,IRR an Payback approaches.

Answer 1

If we take NPV into consideration to select the effective method, we observed that installation of tractor will give the company more NPV than incurring cost on Mules. NPV for Tractor is $4720 which is more than mules which is $1552 .

when we take payback period into consideration, then spending on mules will return your investment in 4 years which is less than payback period for tractor.

the decision lies with the individual as to what approach is efficient and profitable.