For the Chart below of Old Backhoes and New Back hoes Can you provide how you got these Calculations . I dont Understand the Answer. Thank You. Can you also provide the Net cash flows for the Old Back Hoes and the New Backhoes in the chart you provided when finding the Net Present Value. Thank you.
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 |
For the Chart below of Old Backhoes and New Back hoes Can you provide how you got these Calculations . I dont Understand the Answer. Thank You.
Can you also provide the Net cash flows for the Old Back Hoes and the New Backhoes in the chart you provided when finding the Net Present Value. Thank you.
Can you also Round off the NPV Discount factor 3 decimal places. For example. 0.925925926 Round it off to 0.926.
A. Calculation of net present value
a. Old backhoes
| YEAR | CASH FLOWS | 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.
Long term investment decisions are known as capital budgeting. In order to get profit the resources of the organization are allocated in long term investments projects.
Methods of capital budgeting
1. traditional method
a. urgency method
b. payback method
c. ARR
2. modern methods
a. IRR
b. NPV
c. benefit cost ratio
d. net terminal value method
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