Comparing the internal rate of return for each choice

Assignment Help Accounting Basics

Reference no: EM132085454

Question: 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

Instructions: (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.

(2) Using the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.)

(3) Comparing 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?

Reference no: EM132085454

Questions Cloud

Carbonate ion and hydrogen peroxide molecule : Write Lewis structures for the hydrogen carbonate ion and hydrogen peroxide molecule, with resonance forms where appropriate.

Moving toward environmental sustainability : Write a resume of "Cradle-to-Cradle Design at Herman Miller: Moving Toward Environmental Sustainability" harvard business review

Calculate the equilibrium pressures of all species : If pure phosgene at an initial pressure of 1.0 atmosphere decomposes, calculate the equilibrium pressures of all species.

What is the amount of lantz company total assets : The liabilities of Lantz Company are $96,300 and the stockholders' equity is $256,000. What is the amount of Lantz Company's total assets

Comparing the internal rate of return for each choice : Evaluate in the following ways whether to purchase the new equipment or overhaul the old equipment. (Hint: For the old machine, the initial investment).

Gordon gekko make his ideas convincing : How does Gordon Gekko make his ideas convincing? Are they ethical ideas?

Compounds that could have resulted in that set of reworks : Identify, in the correct order, the compounds that could have resulted in that set of reworks. Note: More than one answer is possible, but you need to provide

What are the differences between expenditures and expenses : What are the differences between expenditures and encumbrances? What are the differences between expenditures and expenses

Calculate watts account receivable turnover : Watts Inc. specializes in imported goods, focusing particularly on food products. Feb 2013, the company realized net sales of $9,700,000 and average trade.

User Account

All Pages