A partial list of Waterways accounts and their balances for the month of November follows.

Accounts Receivable $ 295,000

Advertising Expenses 54,000

Cash 260,000

DepreciationFactory Equipment 16,800

DepreciationOffice Equipment 2,500

Direct Labor 22,000

Factory Supplies Used 16,850

Factory Utilities 10,200

Finished Goods Inventory, November 30 68,300

Finished Goods Inventory, October 31 72,550

Indirect Labor 48,000

Office Supplies Expense 1,400

Other Administrative Expenses 72,000

Prepaid Expenses 41,250

Raw Materials Inventory, November 30 52,700

Raw Materials Inventory, October 31 38,000

Raw Materials Purchases 185,400

RentFactory Equipment 47,000

RepairsFactory Equipment 4,200

Salaries 325,000

Sales 1,350,000

Sales Commissions 40,500

Work In Process Inventory October 31 52,900

Work In Process Inventory, November 30 42,000

Question: Currently the corporation has no debt. It is considering purchasing replacement backholes see information underneath. If you decide Waterways should purchase the new backhoes, how do you plan on paying for the investment?

(This is a continuation of the Waterways Problem from Chapters 19 through 25.)

WCP26 Waterways 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 $40,425 $53,900