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26-1
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)
(2)
PAYBACK METHOD
Cost of Capital Investment Net Annual Cash Flow = Cash Payback Period
New
Old
Cost of Capital Investment
$158,000*
$55,000
26-2
(3)
INTERNAL RATE OF RETURN
Investment Required Net Annual Cash Flows = Internal Rate of Return Factor
$158,000
$53,900
= 2.9314
(b) Intangible benefits include faster completion of jobs due to the increased speed of the
backhoes. The depth and width of the trenches will be more accurate. Also, the new
backhoes have considerably more comforts for the operator than the old backhoes.
(c) The decision would be a difficult one to make. There is little difference in the net present
value, although buying new backhoes is slightly higher. All the other indicators suggest
that keeping the old backhoes for another 8 years may be the best decision at this time.
