Question
1.(30 points total) Big Green Farms LLC, despite their name, is considering replacing one of their tractors with a 215 HP Case-IH Puma 220 Powerdrive.
1.(30 points total) Big Green Farms LLC, despite their name, is considering replacing one of their tractors with a 215 HP Case-IH Puma 220 Powerdrive. The alternative is a 220 HP John Deere 6215R. Given their preferences for green equipment, the 6215R will see more annual use than the Case-IH tractor and therefore, has a shorter economic life. Relevant information on each tractor is shown below: Item John Deere 6215R Case-IH Puma 220 Price ($) $205,668 $221,693 Economic life (years) 12 15 Usage (hours/year) 500 400 Salvage value (% of Price) 27.5% 23.0% Ownership cost ($/year) $17,919 $17,232 Operating cost ($/hour) $67.35 $68.53 a.(20 points) Help Big Green Farms LLC decide which tractor to purchase based on the Equivalent Annual Annuity method of capital budgeting if their discount rate is 10%. b.(10 points) Find the minimum discount rate, above which you would advise Big Green Farms LLC to purchase the other tractor.
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