(b) Dairy Ltd runs a highly successful dairy farm in the heart of the Golden Vale. The tractor which is used to work the

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(b) 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 flowfor 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)
12,000 12,000 Year 1 10,000 11,000 Year 2 25,000 22,000 Year 3
48,000 96,000 Year 4 3,000 -8,000 Year 4 (sale of new tractor)
25,000 33,000.
The following is the present value of €1: PRESENT VALUE OF €1
10% 12% Year 1 0.909 0.893 Year 2 0.826 0.797 Year 3 0.751 0.712
Year 4 0.683 0.636 i. Which tractorshould Dairy Ltd purchase using
the net present value investment appraisalmethod? **Hint:
Calculations for both tractors using both rates are necessary ii.
What is the internal rate of return on the two-wheel tractor?