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|
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.
Case Study WP27
(Note: This is a continuation of the Waterways case from Chapters 19–26.)
WP27 Waterways Corporation 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. Waterways is considering buying five new backhoes to replace the backhoes it now has. This problem asks you to evaluate that decision, using various capital budgeting techniques.
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