Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Waterways Corporation puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the

Waterways Corporation 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. 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 $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 Click here to view PV table.

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.)

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.)

NPV of New + Old Backhoes

Payback period of New+Old Backhoes

Profitability Index of New+Old Backhoes

IRR of New+Old Backhoes

This problem asks you to evaluate that decision, using capital budgeting technique.

Step by Step Solution

3.43 Rating (153 Votes )

There are 3 Steps involved in it

Step: 1

1 Compute the net present value of old and new black hoes Net present value of old black hoes Thu... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Document Format ( 2 attachments)

PDF file Icon
609961a9e4cdb_29613.pdf

180 KBs PDF File

Word file Icon
609961a9e4cdb_29613.docx

120 KBs Word File

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Accounting Principles

Authors: Jerry Weygandt, Paul Kimmel, Donald Kieso

12th edition

1119132223, 978-1-119-0944, 1118875052, 978-1119132226, 978-1118875056

More Books

Students also viewed these Accounting questions

Question

Factor completely. p(p + 2) + p(p + 2) - 6(p + 2)

Answered: 1 week ago