Current Attempt in Progress 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 $88.200 $201.955 Salvage value now $42.200 Investment in major overhaul needed in next year $54.560 Salvage value in 8 years $14.800 $90,000 Remaining life 8 years 8 years Net cash flow generated each year $31.000 $44.500 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.)
Current Attempt in Progress 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 $88.200 $201.955 Salvage value now $42.200 Investment in major overhaul needed in next year $54.560 Salvage value in 8 years $14.800 $90,000 Remaining life 8 years 8 years Net cash flow generated each year $31.000 $44.500 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.)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter19: Capital Investment
Section: Chapter Questions
Problem 25P
Related questions
Question
Transcribed Image Text:Current Attempt in Progress
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
$88.200
$201.955
Salvage value now
$42.200
Investment in major overhaul needed in next year
$54.560
Salvage value in 8 years
$14.800
$90,000
Remaining life
8 years
8 years
Net cash flow generated each year
$31.000
$44.500
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.)
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