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.

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. $(3)$ Comparing the profitability index for each choice. $($Round answers to $2$ decimal places, e$.$g$.1\mathrm{.}25)$

New Backhoes

Old Backhoes

Profitability Index

Waterways should

equipment.

Calculate the internal rate of return factor for the new and old blackhoes. $($Round answers to $5$ decimal places, e$.$g$.5\mathrm{.}27647.)$

New Backhoes

Old Backhoes

IRR Factor

$(4)$ Comparing the internal rate of return for each choice to the required $8\%$ discount rate.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.

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.

Purchase cost when new

Salvage value now

Investment in major overhaul needed in next year

Salvage value in $8$ years

Remaining life

Net cash flow generated each year

Old Backhoes

$$90,300$

$$42\mathrm{.}200$

$$54\mathrm{.}774$

$$15\mathrm{.}000$

$8$ vears

$$30,600$

New Backhoes

$$197,860$

$$92,000$

$8$ vears

$$43\mathrm{.}000($a$)$ 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 O decimal places, e$.$g$.5,275.)$

New Backhoes

Old Backhoes

Net Present Value

$$

Waterways should buy New Backhoes equipment. $(2)$ Using the cash payback method for each choice. $($Hint: For the old machine, evaluate the payback of an overhaul.$)$

$2$ decimal places, e$.$g$.1\mathrm{.}25)$

New Backhoes

Old Backhoes

Payback Period

years

years

Waterways should retain Old Backhoes equipment.

$(3)$ Comparing the profitability index for each choice. $($Round answers to $2$ decimal places, e$.$g$.1\mathrm{.}25)$

New Backhoes

Old Backhoes

Profitability Index

Waterways should retain Old Backhoes equipment.$(3)$ Comparing the profitability index for each choice. $($Round answers to $2$ decimal places, e$.$g$.$

New Backhoes

Old Backhoes

Profitability Index

Waterways should retain Old Backhoes equipment.

Calculate the internal rate of return factor for the new and old blackhoes. $($Round answers tr places, e$.$g$.5\mathrm{.}27647.)$

New Backhoes

Old Backhoes

IRR Factor

$(4)$ Comparing the internal rate of return for each choice to the required $8\%$ discount rate.

Waterways should retain Old Backhoes equipment.