Nemo Haulers is considering whether to purchase a new mini tractor for moving furniture within its warehouse. Nemo calculates th
at its current mini tractor generates $3,100 of cash flow per year. A new mini tractor would cost $3,000 and would provide cash flow of $4,000 per year for five years. What is the equivalent annual cash flow for the new mini tractor (round to the nearest dollar), and should Nemo purchase the new tractor? Assume the cost of capital for Nemo is 10 percent.
$3,208.62. The initial cost of a new mini tractor is $3,000, which can generate five annual cash flows of $4,000 against a discount rate of 10%. To find the present value of these cash flows, multiplying $4,000 by the PV annuity factor of 3.7908 provides a total of $15,163.20. Subsequently, the equivalent annual cash flow is calculated with the formula EAC = (NPV x r) / [1 - (1 + r)⁻ⁿ], giving us $3,208.62.
