Calculate the net present value of the old backhoes and the new backhoes. B. Discuss the net present value of each, including what the calculations reveal about whether the company should purchase the new backhoes or continue using the old backhoes. C. Calculate the payback period for keeping the old backhoes and purchasing the new backhoes. (Hint: For the old machines, evaluate the payback of an overhaul.) D. Discuss the payback method and what the payback periods of the old backhoes and new backhoes reveal about whether the company should purchase new backhoes or continue using the old backhoes.
Down below is the Chart where the New and Old Backhoes are displayed. Follow these Instructions:
A. Calculate the
B. Discuss the net present value of each, including what the calculations reveal about whether the company should purchase the new backhoes or continue using the old backhoes.
C. Calculate the payback period for keeping the old backhoes and purchasing the new backhoes. (Hint: For the old machines, evaluate the payback of an overhaul.)
D. Discuss the payback method and what the payback periods of the old backhoes and new backhoes reveal about whether the company should purchase new backhoes or continue using the old backhoes. Calculate the profitability index for keeping the old backhoes and purchasing new backhoes.
- The following information is available to use in deciding whether to purchase the new backhoes or old backhoes. Using the 8% Present Value of an
Annuity of 1.
|
Old Backhoes |
New Backhoes |
||
|
Purchase cost when new |
$90,000 |
$200,000 |
|
|
Salvage value now |
$42,000 |
||
|
Investment in major overhaul needed in next year |
$55,000 |
||
|
Salvage value in 8 years |
$15,000 |
$90,000 |
|
|
Remaining life |
8 years |
8 years |
|
|
Net cash flow generated each year |
$30,425 |
$43,900 |
Capital budgeting or Capital investment projects
The term capital budgeting simply means decisions related to investments. It involves allocation of resources into various long term investments so that profit can be generated.
There are various methods involved in capital budgeting that includes
1. Traditional Methods 1. Modern Methods
a. Urgency method a. Discounted payback method
b. Pay back method b. Net present value method
c. Average rate of return c. Benefit cost ratio
d. Internal rate of return
e. Net terminal value method
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