Dairy Ltd runs a highly successful dairy farm in the heart of the Golden Vale. The tractor

which is used to work the land is at the stage where it is causing a lot of problems and spends

most of its time with the mechanic. Dairy Ltd is planning on replacing the tractor and has to

decide between two models, a two$-$wheel drive and a four$-$wheel drive. To avoid a

reoccurrence of the problems they are currently experiencing with the existing tractor, Dairy

Ltd has decided to replace the new tractor at the end of the fourth year. The incremental cash

flow for the purchase of the new tractors has been calculated as follows:

Two$-$wheel Four$-$wheel

Net cash inflows: $$

Year $0-95,600-125,000$

Year $0($sale of old tractor$)12,00012,000$

Year $110,00011,000$

Year $225,00022,000$

Year $348,00096,000$

Year $43,000-8,000$

Year $4($sale of new tractor$)25,00033,000$

The following is the present value of $1$:

PRESENT VALUE OF $110\%12\%$

Year $10\mathrm{.}9090\mathrm{.}893$

Year $20\mathrm{.}8260\mathrm{.}797$

Year $30\mathrm{.}7510\mathrm{.}712$

Year $40\mathrm{.}6830\mathrm{.}636$

Which tractor should Dairy Ltd purchase using the net present value investment appraisal

method? $($Hint: To answer the question below, you will need to do the calculations using

$10\%$ and $12\%)$

What is the internal rate of return on the two$-$wheel tractor?