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 Answer that Bartebly provided is down below. My Questions is: Can you display what Pv factor you used to get the approximate present value calculations. My Question: Can you also provide the Profitability Index of both Old and New Backhoes.
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 |
Answer that Bartebly provided is down below.
My Questions is: Can you display what Pv factor you used to get the approximate present value calculations.
My Question: Can you also provide the Profitability Index of both Old and New Backhoes. Thank You
A. Calculation of
a. Old backhoes
| YEAR | DISCOUNTING FACTOR @8% | PV | |
| 1 | 30425 | 0.926 | 28173.55 |
| 2 | 30425 | 0.857 | 26074.22 |
| 3 | 30425 | 0.794 | 24157.45 |
| 4 | 30425 | 0.735 | 22362.37 |
| 5 | 30425 | 0.681 | 20719.42 |
| 6 | 30425 | 0.630 | 19167.75 |
| 7 | 30425 | 0.583 | 17737.77 |
| 8 | 30425 | 0.540 | 16429.5 |
| TOTAL | 5.746 | 174822.03 |
Here present value is 174822.03.
NPV = 174822.03-90000 = 84822.03
b. New backhoes
| YEAR | CASHFLOWS | D.F 28% | present value |
| 1 | 43900 | 0.926 | 40651.4 |
| 2 | 43900 | 0.857 | 37622.3 |
| 3 | 43900 | 0.794 | 34856.6 |
| 4 | 43900 | 0.735 | 32266.5 |
| 5 | 43900 | 0.681 | 29895.9 |
| 6 | 43900 | 0.630 | 27657 |
| 7 | 43900 | 0.583 | 25593.7 |
| 8 | 43900 | 0.540 | 23706 |
| total | 5.746 | 252249.4 |
Here present value is 252249.4
NPV = 252249.4-200000
= 52249.4
B. The company can continue old backhoes. Because higher the NPV is better the project
C. Calculation of pay back
pay back period =original cost/annual net
a. old backhoes
payback=55000/30425
=1.8
The cost of original investment is recovered by one year eight months.
b. new backhoes
payback= 200000/43900
=4.5
The cost of investment is recovered by four year five months.
D. Payback period means time taken to recover the initial cost of investment.
payback period=
In the above case it is better to continue with old backhoes because its payback period is lesser(1.8) as compared to the new backhoes(4.5). Shorter the pay back is better.
Meaning of Net Present Value
Net present value(NPV) is the difference between the PV of cash inflows and the PV of cash outflows over a period of time. It is used in capital budgeting and investment planning to analyze the profitability of a project.
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