ACCT 556 Strayer University the Capital Investment Evaluation

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ACCT 556

Strayer University

ACCT

Description

Instructions

1. Evaluate, discuss, and compare 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.)

  • Calculate the net present value of the old backhoes and the new backhoes.
  • Discuss the net present value of each, including what the calculations reveal about whether the company should purchase the new backhoes or continue using the old backhoes.
  • Calculate the payback period for keeping the old backhoes and purchasing the new backhoes. (Hint: For the old machines, evaluate the payback of an overhaul.)
  • Discuss the payback method and what the payback periods of the old backhoes and new backhoes reveal about whether the company should purchase new backhoes or continue using the old backhoes. Calculate the profitability index for keeping the old backhoes and purchasing new backhoes.
  • Discuss the profitability index of each, including what the calculations reveal about whether the company should purchase the new backhoes or continue using the old backhoes.

2. Identify and discuss any intangible benefits that might influence this decision.
3. Answer the following: Should the company purchase the new backhoes or continue using the old backhoes? Explain your decision.

Unformatted Attachment Preview

Scenario Shoals Corporation puts significant emphasis on cash flow when planning capital investments. The company chose its discount rate of 8 percent based on the rate of return it must pay its owners and creditors. Using that rate, Shoals Corporation then uses different methods to determine the most appropriate capital outlays. This year, Shoals Corporation is considering buying five new backhoes to replace the backhoes it now owns. 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
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Explanation & Answer

Please view explanation and answer below.

Running head: CAPITAL INVESTMENT

Evaluate the Capital Investment
Student Name
Institution Affiliation

1

PROJECT

2

1. Net Present Value
1. Present Net
Value for the Old
Backhoe and the
New Backhoe
Part 1
Net
Present
Value for
Old
Backhoes
Period
0
Cash
Outflow
-55000
Cash
inflows
Generated
Net Cash
Salvage
Value of
the Old
Backhoe
Net Cash
Outflow
Present
Value
factor
@8%
Present
Value
Net
Present
Value=
The Net
Present
Value for
the New
Backhoes
Period
Cash

1

2

3

4

5

6

7

8

30425

30425

30425

30425

30425

30425

30425

30425

15000

-55000

1
-55000

30425

30425

30425

30425

30425

30425

30425

45425

0.9259
26
28171.
3

0.8573
39
26084.
53

0.7938
32
24152.
35

0.7350
3
22363.
28

0.6805
83
20706.
74

0.6301
7
19172.
91

0.5834
9
17752.
7

0.5402
69
24541.
71

1

2

3

4

5

6

7

8

12794
5.5

0
-

PROJECT
Outflow
is the
buying
price.
Generated
Cash
Inflows
Value for
selling an
old
machine
Salvage

Net Cash
Outflow
Present
Value
factor
@8%

3
20000
0

43900

43900

43900

43900

43900

43900

43900

42000

15800
0

43900

90000

43900

43900

43900

43900

43900

43900

...


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