Solution:

The cash flow diagram of Company-1 tractor is shown in Fig. 2.19.

Fig. 2.19 Cash flow diagram of Company-1 Tractor

From the cash flow diagram it is noted that three single amounts i.e. Rs.110000 each are located at the end of year ‘3', year ‘6' and year ‘9'. For these amounts, first the equivalent present worth at time ‘0' is determined and then equivalent annual worth of this present worth is computed using the appropriate compound interest factor.

The equivalent uniform annual worth of Company-1 tractor is determined as follows;

Now putting the values of different compound interest factors in the above expression;

AW₁ = - 405104

The cash flow diagram of Company-2 tractor is shown in Fig. 2.20.

Fig. 2.20 Cash flow diagram of Company-2 Tractor

From Company-2 tractor, two single amounts i.e. Rs.120000 each are located at the end of year ‘4', and year ‘8'. Similar to first alternative, first the equivalent present worth at time ‘0' of these amounts is determined and then equivalent annual worth is computed.
The equivalent uniform annual worth of Company-2 tractor is computed as follows;

Now putting the values of different compound interest factors in the above expression;

AW₂ = - 398577

From the above comparison, it is observed that Company-2 Tractor shows lower negative equivalent uniform annual worth as compared to Company-1 tractor. Thus the contractor should select Company-2 Tractor for purchase.