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Waterways puts much emphasis on cash flow when it plans for capital investments. The company choses discount rate of that rate. Waterways then uses different
Waterways puts much emphasis on cash flow when it plans for capital investments. The company choses discount rate of that rate. Waterways then uses different methods to determine the best decisions for making capital outlas based on the rate of returnitust pay its owners and creditors Using This year Waterways is considering buying five new backhoes to replace the backhoes it now has. The new backhoes are fastercost less to provide for more accurate trench ging 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 New Backhoes $89,000 $198.095 $41,900 555.130 $15.000 $91.000 Byears $29.800 $44.500 (a) Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. int. For the old machine, the in machine, subtract the salvage value of the old machine to determine the initial cost of the investment) estment is the cost of the overal for the (1) Using the net present value method for buying new or keeping the old. For calculation purposes se 5 decimal places as displayed in the factor to negative sin preceding the number -45 or parentheses 1451. Round finanswer to decimal places 5.275) provided the t h ere New Backhoes Old Backhoes Net Present Value $ Waterways should equipment (2) Using the payback method for each choice. Hint. For the old machine, evaluate the payback of an over Round a t 2 1 25 New Backhoes Old Backhoes Payback Period Waterways should Waterways should Equipment. buy New Backhoes retain Old Backhoes 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 (4) Comparing the internal rate of return for each choice to the required 8% discount rate. Waterways should 4 equipment
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