Comparing Tractor Financing Options
After land, machinery is often the largest single investment on a farm. Many dollars can be saved by carefully exploring all options for acquiring machinery. The objective of this exercise is to compare three different plans for financing the
purchase of a new tractor.
A new tractor can be acquired by:
Discounting future payments to their present value allows you to directly compare the financing plans. Each future payment is converted to a present value by dividing it by (1 + the discount rate) for each year into the future that it occurs. Assume your average cost of capital, minus inflation, is 6%, so you would use a factor of 1.06 per year to discount future payments to their present value.
Future payment = $10,000 three years from now
Present value = $10,000 / (1.06 x 1.06 x 1.06) = $10,000 / (1.06)3 = $8,396
Alternative 1. Purchase tractor outright. There is no need to discount the payment, since it is made at the time of purchase.
Purchase price $______________*
Alternative 2. Pay 20 percent of the purchase price down and finance the remainder with 4 annual payments, beginning in one year. The amortization factor for a 4-year, 7.5% interest loan is .29857.
Annual payment = purchase price x 80% x amortization factor = $_______________*
*Round values to the nearest whole dollar.
Alternative 3. Lease the tractor for 4 years, then purchase it for the buyout price (see Table 1). Lease payments are due at the beginning of each year.
Under which plan do you pay the most total dollars, before discounting? _______________________
Which alternative plan has the lowest present value, after discounting? __________________________
Which has the lowest payment at the time of purchase? _______________________________________
Which financing alternative would you choose, and why? _________________________________________
|Alternative 2||Annual payment||64500*80%*.29857||15406|
|Alternative 3||Annual payment||12250|
|Under which plan do you pay the most total dollars, before discounting?|
|Most dollars paid in leasing (Alternative 3)|
|Which alternative plan has the lowest present value, after discounting?|
|Alternative 1 has lowest PV|
|Which has the lowest payment at the time of purchase?|
|Lowest payment is of Alternative 2|
|I would chose alternative 1 as it has lowest cost based on PV terms|
Comparing Tractor Financing Options After land, machinery is often the largest single investment on a farm. Many dollars can be saved by carefully exploring all options for acquiring machinery. The ob...
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