Instructions

Waterways (Chapter 27) 

For this assignment, you will apply what you have learned  from the unit      lesson and required unit resources. The Waterways (WP27) case is  located on      page 27-35 of the textbook. 

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 that 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. 

  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  

Instructions: 

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? 

Write  your responses  to these questions in a Word document. Your paper      should be a  minimum of two  pages in length.  You are not required to support     your assignment with outside  sources; however,  if you do, adhere to APA   Style   when creating citations and  references.