ss Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% basedon the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine thebest 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, costless to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenanceagreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoeoperators 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.Purchase cost when newSalvage value nowInvestment in major overhaul needed in next yearSalvage value in 8 yearsRemaining lifeNet cash flow generated each yearNet Present ValueClick here to view PV 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 theinitial cost of the investment.)Waterways should(1) Using the net present value method for buying new or keeping the old. (For calculation purposes, use 5 decimal places as displayed inthe 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 O decimal places, e.g. 5,275.)$Payback PeriodNew BackhoesOld Backhoes$90,000$41,700$54,964$14,7008 years$30,200New BackhoesNew Backhoes$204,187$equipment.years$88,0008 years$43,100(2) Using the cash payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) (Round answers to2 decimal places, e.g. 1.25)Old BackhoesOld Backhoesyears Waterways should(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)Old BackhoesProfitability IndexWaterways shouldIRR FactorNew BackhoesCalculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)Waterways shouldequipment.New BackhoeseTextbook and Mediaequipment.(4) Comparing the internal rate of return for each choice to the required 8% discount rate.Old Backhoesequipment.

Net Present Value (NPV): It is the difference between the present value of cash inflows and the…

(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 O decimal places, e.g. 5,275.) New Backhoes Net Present Value Waterways should Payback Period equipment. (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 years Old Backhoes years

(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 O decimal places, e.g. 5,275.) New Backhoes Net Present Value Waterways should Payback Period equipment. (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 years Old Backhoes years

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

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.
Purchase cost when new
Salvage value now
Investment in major overhaul needed in next year
Salvage value in 8 years
Remaining life
Net cash flow generated each year
Net Present Value
Click here to view PV 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.)
Waterways should
(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 O decimal places, e.g. 5,275.)
$
Payback Period
New Backhoes
Old Backhoes
$90,000
$41,700
$54,964
$14,700
8 years
$30,200
New Backhoes
New Backhoes
$204,187
$
equipment.
years
$88,000
8 years
$43,100
(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)
Old Backhoes
Old Backhoes
years

Waterways should
(3) Comparing the profitability index for each choice. (Round answers to 2 decimal places, e.g. 1.25)
Old Backhoes
Profitability Index
Waterways should
IRR Factor
New Backhoes
Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)
Waterways should
equipment.
New Backhoes
eTextbook and Media
equipment.
(4) Comparing the internal rate of return for each choice to the required 8% discount rate.
Old Backhoes
equipment.

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