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C26_WCP solution_SV - SOLUTION Chapter 26 Waterways...

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SOLUTION Chapter 26 Waterways Continuing Problem WCP26 (a) (1) NET PRESENT VALUE Buy New Backhoes Time Period Cash Flow 8% Discount Rate Present Value Equipment purchase 0 $ 200,000 1 $ (200,000) Salvage value of old equip 0 42,000 1 42,000 Net cash flow 8 53,900 5.74664 309,744 Salvage value 8 90,000 0.54027 48,624 Net present value $ 200,368 NET PRESENT VALUE Keep Old Backhoes Time Period Cash Flow 8% Discount Rate Present Value Overhaul cost 1 $ 55,000 0.92593 $ (50,926) Net cash flow 8 40,425 5.74664 232,308 Salvage value 8 15,000 0.54027 8,104 Net present value $ 189,486 (2) PAYBACK METHOD Cost of Capital Investment ÷ Net Annual Cash Flow = Cash Payback Period New Old Cost of Capital Investment $158,000 $55,000 Net annual cash flow $ 53,900 $40,425 Payback time 2.93 years 1.36 years 26-1
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(3) INTERNAL RATE OF RETURN Investment Required ÷ Net Annual Cash Flows = Internal Rate of Return Factor $ 158,000 $53,900 = 2.9314 $55,000 $40,425 = 1.36 = a much high return than buying a new one Both of these values are above the factors presented in the text table, so they are above 15% and well over the required 8% discount rate.
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