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:

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?

(c) Transport Ltd is considering fitting a mounted forklift to each of its five delivery trucks. They have decided to base their decision on the accounting rate of return and provide you with the following information: The cost of the mounted forklifts will be 95,000 and they are expected to have a five year life with a scrap value of 5,000. The purchase of the forklifts is expected to result in a 10,000 cash inflow in the first year and cash inflows of 40,000, 40,000, 60,000 and 45,000 in years two to five respectively. Determine the forklifts accounting rate of return.

(d) Explain what risk is in the context of capital investment decisions and why it is particularly important in this context

Net cash inflows: Year 0 Year 0 (sale of old tractor) Year 1 Year 2 Year 3 Year 4 Year 4 (sale of new tractor) Two-wheel -95,600 12,000 10,000 25,000 48,000 3,000 25,000 Four-wheel -125,000 12,000 11,000 22,000 96,000 -8,000 33,000 The following is the present value of 1: PRESENT VALUE OF 1 Year 1 Year 2 Year 3 Year 4 10% 0.909 0.826 0.751 0.683 12% 0.893 0.797 0.712 0.636