ss790--99 - The following information is available to use...

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?
(c) What decision would you make and why?