Waterways put 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 that 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. Information 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 Instructions: A. In the following methods evaluate whether to purchase the new equipment or to 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.) Use the net present value method for buying new or keeping the old. Use the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) Compare the profitability index for each choice. Compare the internal rate of return for each choice to the required 8% discount rate. B. Are there any intangible benefits or negatives that would influence this decision? C. What decision would you make, and why?
Waterways put 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 that 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. Information 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 Instructions: A. In the following methods evaluate whether to purchase the new equipment or to 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.) Use the net present value method for buying new or keeping the old. Use the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.) Compare the profitability index for each choice. Compare the internal rate of return for each choice to the required 8% discount rate. B. Are there any intangible benefits or negatives that would influence this decision? C. What decision would you make, and why?
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
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Question
PLEASE ASSIST ME WITH PARTS A (Number 4) B & C
Waterways put much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the
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.
| Information | 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 |
Instructions:
A. In the following methods evaluate whether to purchase the new equipment or to 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.)
-
- Use the
net present value method for buying new or keeping the old. - Use the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.)
- Compare the profitability index for each choice.
- Compare the
internal rate of return for each choice to the required 8% discount rate.
- Use the
B. Are there any intangible benefits or negatives that would influence this decision?
C. What decision would you make, and why?
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