Table of Contents
Instructions
Waterways (Chapter 27)
Information | 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 |
- In the following methods, evaluate whether to purchase the new equipment or to 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.)
- Use the net present value method for buying new or keeping the old.
- Use the payback method for each choice. (Hint: For the old machine, evaluate the payback of an overhaul.)
- Compare the profitability index for each choice.
- Compare the internal rate of return for each choice to the required 8% discount rate.
- Are there any intangible benefits or negatives that would influence this decision?
- What decision would you make, and why?
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