Vaterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 9% based on the rate of return it must pay its owners and creditors. Using hat rate, Waterways then uses different methods to determine the best decisions for making capital outlays. his year Watenrways 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 omfort 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 perators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes. he following information is available to use in deciding whether to purchase the new backhoes. Old Backhoes New Backhoes "urchase cost when new $88,600 $197,129 Salvage value now $42,400 nvestment in major overhaul needed in next year $55,815 Salvage value in 8 years $14,800 $88,000 zemaining life det cash flow generated each year 8 years 8 years $30,500 $43,100 lick 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 nachine, subtract the salvage value of the old machine to determine the initial cost of the investment.) 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 alue is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.) New Backhoes Old Backhoes let Present Value 127786 120425 $.. ..w
Vaterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 9% based on the rate of return it must pay its owners and creditors. Using hat rate, Waterways then uses different methods to determine the best decisions for making capital outlays. his year Watenrways 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 omfort 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 perators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes. he following information is available to use in deciding whether to purchase the new backhoes. Old Backhoes New Backhoes "urchase cost when new $88,600 $197,129 Salvage value now $42,400 nvestment in major overhaul needed in next year $55,815 Salvage value in 8 years $14,800 $88,000 zemaining life det cash flow generated each year 8 years 8 years $30,500 $43,100 lick 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 nachine, subtract the salvage value of the old machine to determine the initial cost of the investment.) 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 alue is negative, use either a negative sign preceding the number eg -45 or parentheses eg (45). Round final answer to 0 decimal places, e.g. 5,275.) New Backhoes Old Backhoes let Present Value 127786 120425 $.. ..w
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
irr factor?
Transcribed Image Text:Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 9% 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
$88,600
$197,129
Salvage value now
$42,400
Investment in major overhaul needed in next year
$55,815
Salvage value in 8 years
$14,800
$88,000
Remaining life
8 years
8 years
Net cash flow generated each year
$30,500
$43,100
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.)
(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 0 decimal places, e.g. 5,275.)
New Backhoes
Backhoes
Net Present Value
127786:
120425
Transcribed Image Text:Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)
New Backhoes
Old Backhoes
IRR Factor
25.69729
53.31808:
(4) Comparing the internal rate of return for each choice to the required 9% discount rate.
retain Old Backhoes
Waterways should
|equipment.
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