Waterways Continuing Problem 26
Your answer is partially correct. Try again. | |
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.
In 2017 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 | $30,425 | $43,900 |
Click here to view PV table.
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.)
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 0 decimal places, e.g.
5,275.)
Answer:
1) | |||||
NPV Buying New | |||||
Year | Investment | Old Salvage Value | Net Cash Flow | Discount rate 8% | Present Value |
0 | -$200,000 | $42,000 | -$158,000 | 1.0000 | -$158,000 |
1 | $43,900 | 0.9259 | $40,648.15 | ||
2 | $43,900 | 0.8573 | $37,637.17 | ||
3 | $43,900 | 0.7938 | $34,849.24 | ||
4 | $43,900 | 0.7350 | $32,267.81 | ||
5 | $43,900 | 0.6806 | $29,877.6 | ||
6 | $43,900 | 0.6302 | $27,664.45 | ||
7 | $43,900 | 0.5835 | $25,615.23 | ||
8 | $43,900 | 0.5403 | $23,717.8 | ||
8 | $90,000 | 0.5403 | $48,624.2 | ||
NPV | $142,901.65 | ||||
NPV keeping the old | |||||
Year | Investment | Net Cash Flow | Discount rate 8% | Present Value | |
0 | -$55,000 | -$55,000 | 1.0000 | -$55,000 | |
1 | $30,425 | 0.9259 | $28,171.3 | ||
2 | $30,425 | 0.8573 | $26,084.53 | ||
3 | $30,425 | 0.7938 | $24,152.35 | ||
4 | $30,425 | 0.7350 | $22,363.28 | ||
5 | $30,425 | 0.6806 | $20,706.74 | ||
6 | $30,425 | 0.6302 | $19,172.91 | ||
7 | $30,425 | 0.5835 | $17,752.7 | ||
8 | $30,425 | 0.5403 | $16,437.68 | ||
8 | $15,000 | 0.5403 | $8,104.03 | ||
NPV | $127,945.52 |
Profitability Index | |
PI = 1 + NPV/Initial Investment | |
Buying New Blackholes = 1 + 142,901.65/$158,000 | 1.90 |
Keeping the Old Blackholes = 1 + 127,945.52/$55000 | 3.33 |
Waterways Continuing Problem 26 Your answer is partially correct. Try again. Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discou...
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...
Exercise 24-4 Partially correct answer. Your answer is partially correct. Try again. BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below. Machine A Machine B Original cost $76,900 $186,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $19,600 $39,800 Estimated annual cash outflows $5,150 $10,080...
Your answer is partially correct. Try again. BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn’t equipped to do. Estimates regarding each machine are provided below. Machine A Machine B Original cost $74,500 $183,000 Estimated life 8 years 8 years Salvage value 0 0 Estimated annual cash inflows $20,300 $40,200 Estimated annual cash outflows $5,100 $9,810 Click here to view PV...
please help, do not know what I am doing wrong and have limited tries to answer left! Thank you!!!
Do It Review 26-2 Your answer is partially correct. Try again. Wayne Company is considering a long-term investment project called ZIP. ZIP will require an investment of $129,984. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,600, and annual cash outflows would increase by $38,300. The company's required rate of return is 11%. Click here to view PV table. Calculate the net present value on this project. (If the...
Partially correct answer. Your answer is partially correct. Try again. Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $255,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $43,000 per year. Now that the investment has been in operation for 1 year, revised figures indicate that it actually cost $261,000, will have a total useful...
Your answer is partially correct. Try again. Hillsong Inc, manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $242,828. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts for years...
Your answer is partially correct. Try again. Aurora Company is considering the purchase of a new machine. The invoice price of the machine is $162,000, freight charges are estimated to be $5,000, and installation costs are expected to be $7,000. Salvage value of the new equipment is expected to be zero after a useful life of 5 years. Existing equipment could be retained and used for an additional 5 years if the new machine is not purchased. At that time,...
Exercise 25-03 Your answer is partially correct. Try again. Hillsong Inc. manufactures snowsuits. Hillsong is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hillsong spent $55,000 to keep it operational. The existing sewing machine can be sold today for $242,003. The new sewing machine would require a one-time, $85,000 training cost. Operating costs would decrease by the following amounts...
Brief Exercise 24-3 Your answer is partially correct. Try again. Thunder Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $150,425 and have an estimated useful life of 9 years. It will be sold for $69,600 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to increase net annual cash flows by $20,300. The company's borrowing rate is 8%. Its cost of capital is 10%....