Project: Evaluate the Capital Investment Scenario Shoals Corporation puts significant emphasis on cash flow when planning capital investments.

Project: Evaluate the Capital Investment
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

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.
This course requires the use of Strayer Writing Standards. For
assistance and information, please refer to the Strayer Writing
Standards link in the left-hand menu of your course. Check with your
professor for any additional instructions.
The specific course learning outcome associated with this assignment is:
Analyze the financial condition of a company using vertical, horizontal, and ratio analysis to make informed decisions.
By submitting this paper, you agree: (1) that you are
submitting your paper to be used and stored as part of the SafeAssign™
services in accordance with the Blackboard Privacy Policy;
(2) that your institution may use your paper in accordance with your
institutions policies; and (3) that your use of SafeAssign will be
without recourse against Blackboard Inc. and its affiliates.

Looking for a Similar Assignment? Our ENL Writers can help. Use the coupon code SAVE30 to get your first order at 30% off!
Students Love Us