Project: Evaluate the Capital Investment Accounting, Finance, SPSS (Other (Not Listed) Sample)
Project: Evaluate the Capital Investment
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:
Purchase cost when new
Salvage value now
Investment in major overhaul needed in next year
Salvage value in 8 years
Net cash flow generated each year
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.
Capital Investment Evaluation: Shoals Corporation
Capital Investment Evaluation (Shoals Corporation)
The evaluation of capital investment is a critical facet across all industries in the business world. Osinski et al. assert that an organization’s success significantly depends on the management’s ability to make the right financing decisions while remaining mindful of the business risks and uncertainties (1). Over time, a company faces a make-buy decision, in the same note that it may need to choose on whether to retain existing production equipment or purchase a new one. It is in this light that this study of Shoals Corporation is intended to analyze and highlight the individual choices of buying new backhoes or doing an overhaul of the older, and making a right decision on the same.
Evaluation, Discussion, and Comparison
The initial costs of investment for each option are given by;
Old Backhoes = $55,000
New Backhoes = $200,000 - $42,000 = $158,000
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