Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of
Posted: Thu May 05, 2022 5:37 am
Waterways puts much emphasis on cash flow when it plans for capital
investments. The company chose its discount rate of 8% based
on the rate of return it must pay its owners and creditors. Using
that rate, Waterways then uses different methods to determine the
best decisions for making capital outlays.
This year Waterways is considering buying five new backhoes to
replace the backhoes it now has. The new backhoes are faster, cost
less to run, provide for more accurate trench digging, have comfort
features for the operators, and have 1-year maintenance agreements
to go with them. The old backhoes are working just fine, but they
do require considerable maintenance. The backhoe operators are very
familiar with the old backhoes and would need to learn some new
skills to use the new backhoes.
The following information is available to use in deciding whether
to purchase the new backhoes.
Old Backhoes
New Backhoes
Purchase cost when new
$90,300
$197,860
Salvage value now
$42,200
Investment in major overhaul needed in next year
$54,774
Salvage value in 8 years
$15,000
$92,000
Remaining life
8 years
8 years
Net cash flow generated each year
$30,600
$43,000
Click here to view the factor table.
(a) Evaluate in the following ways whether to
purchase the new equipment or overhaul the old equipment.
(Hint: For the old machine, the initial investment is
the cost of the overhaul. For the new machine, subtract the salvage
value of the old machine to determine the initial cost of the
investment.)
(1) Using the net present value method for buying new or keeping
the old. (For calculation purposes, use 5 decimal
places as displayed in the factor table provided. If the net
present value is negative, use either a negative sign preceding the
number eg -45 or parentheses eg (45). Round final answer to 0
decimal places, e.g. 5,275.)
New Backhoes
Old Backhoes
Net Present Value
(2) Using the cash payback method for each choice.
(Hint: For the old machine, evaluate the payback of
an overhaul.) (Round answers to 2 decimal places,
e.g. 1.25)
New Backhoes
Old Backhoes
Payback Period
enter a dollar amount rounded to 2 decimal places years
enter a dollar amount rounded to 2 decimal places years
(3) Comparing the profitability index for each
choice. (Round answers to 2 decimal places, e.g.
1.25)
New Backhoes
Old Backhoes
Profitability Index
enter a dollar amount rounded to 2 decimal places
enter a dollar amount rounded to 2 decimal places
Calculate the internal rate of return factor for the new and old
blackhoes. (Round answers to 5 decimal places,
e.g. 5.27647.)
New Backhoes
Old Backhoes
IRR Factor
enter a dollar amount rounded to 5 decimal places
enter a dollar amount rounded to 5 decimal places
(4) Comparing the internal rate of return for each choice to the
required 8% discount rate.
investments. The company chose its discount rate of 8% based
on the rate of return it must pay its owners and creditors. Using
that rate, Waterways then uses different methods to determine the
best decisions for making capital outlays.
This year Waterways is considering buying five new backhoes to
replace the backhoes it now has. The new backhoes are faster, cost
less to run, provide for more accurate trench digging, have comfort
features for the operators, and have 1-year maintenance agreements
to go with them. The old backhoes are working just fine, but they
do require considerable maintenance. The backhoe operators are very
familiar with the old backhoes and would need to learn some new
skills to use the new backhoes.
The following information is available to use in deciding whether
to purchase the new backhoes.
Old Backhoes
New Backhoes
Purchase cost when new
$90,300
$197,860
Salvage value now
$42,200
Investment in major overhaul needed in next year
$54,774
Salvage value in 8 years
$15,000
$92,000
Remaining life
8 years
8 years
Net cash flow generated each year
$30,600
$43,000
Click here to view the factor table.
(a) Evaluate in the following ways whether to
purchase the new equipment or overhaul the old equipment.
(Hint: For the old machine, the initial investment is
the cost of the overhaul. For the new machine, subtract the salvage
value of the old machine to determine the initial cost of the
investment.)
(1) Using the net present value method for buying new or keeping
the old. (For calculation purposes, use 5 decimal
places as displayed in the factor table provided. If the net
present value is negative, use either a negative sign preceding the
number eg -45 or parentheses eg (45). Round final answer to 0
decimal places, e.g. 5,275.)
New Backhoes
Old Backhoes
Net Present Value
(2) Using the cash payback method for each choice.
(Hint: For the old machine, evaluate the payback of
an overhaul.) (Round answers to 2 decimal places,
e.g. 1.25)
New Backhoes
Old Backhoes
Payback Period
enter a dollar amount rounded to 2 decimal places years
enter a dollar amount rounded to 2 decimal places years
(3) Comparing the profitability index for each
choice. (Round answers to 2 decimal places, e.g.
1.25)
New Backhoes
Old Backhoes
Profitability Index
enter a dollar amount rounded to 2 decimal places
enter a dollar amount rounded to 2 decimal places
Calculate the internal rate of return factor for the new and old
blackhoes. (Round answers to 5 decimal places,
e.g. 5.27647.)
New Backhoes
Old Backhoes
IRR Factor
enter a dollar amount rounded to 5 decimal places
enter a dollar amount rounded to 5 decimal places
(4) Comparing the internal rate of return for each choice to the
required 8% discount rate.