Berkley is a new farmer looking to purchase a tractor. Prepare an NPV budget
and calculate the real pre-tax capital recovery costs (CRCs) for the purchase. Use the
following assumptions for Berkley’s potential investment.
• Purchase price of $325,000
• 15-year straight line depreciation
• $25,000 salvage value used for depreciation
• $110,000 terminal value in today’s prices. Used tractors are expected to increase
at the general inflation rate.
• 10% investment tax credit
• 20-year useful life of the tractor.
• 7.5% nominal pre-tax cost of capital
• 21% income tax rate
• 3% inflation
• Repairs costs of $1,500 per year in today’s prices, expected to grow at the
inflation rate