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NPV; PI; payback; IRR Pete's Paving provides custom paving of sidewalks and driveways. One of the most labor-intensive aspects of the paving operation is preparing and mixing materials. Sharon Guillon, corporate engineer, has found new computerized equipment to mix (and monitor the mixing of) materials. According to information received by Guillon, the equipment's cost is $580,000 and has an expected life of eight years. If purchased, the new equipment would replace manually operated equipment. Data relating to the existing and replacement mixing equipment follow. Original cost Present book value Existing Equipment $56,000 $32,000 Annual cash operating costs $180,000 Fair value $12,000 Fair value in eight years Remaining useful life $0 8 years Replacement Equipment $580,000 $36,000 Cost Annual cash operating costs Fair value in eight years Useful life $0 8 years a. Assume that the company's cost of capital is 10 percent, which is to be used in discounted cash flow analysis. (1) Compute the net present value of investing in the new equipment, ignoring taxes. Note: Round your answer to the nearest whole dollar. $ (2) Compute the profitability index of investing in the new equipment, ignoring taxes. Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4). b. Should Pete's Paving purchase the machine based on your answers to part (a) c. Compute the payback period for the investment in the new equipment. (Ignore Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4). Yes No years d. Rounding to the nearest whole percentage, compute the internal rate of return for the equipment investment. %

NPV; PI; payback; IRR Pete's Paving provides custom paving of sidewalks and driveways. One of the most labor-intensive aspects of the paving operation is preparing and mixing materials. Sharon Guillon, corporate engineer, has found new computerized equipment to mix (and monitor the mixing of) materials. According to information received by Guillon, the equipment's cost is $580,000 and has an expected life of eight years. If purchased, the new equipment would replace manually operated equipment. Data relating to the existing and replacement mixing equipment follow. Original cost Present book value Existing Equipment $56,000 $32,000 Annual cash operating costs $180,000 Fair value $12,000 Fair value in eight years Remaining useful life $0 8 years Replacement Equipment $580,000 $36,000 Cost Annual cash operating costs Fair value in eight years Useful life $0 8 years a. Assume that the company's cost of capital is 10 percent, which is to be used in discounted cash flow analysis. (1) Compute the net present value of investing in the new equipment, ignoring taxes. Note: Round your answer to the nearest whole dollar. $ (2) Compute the profitability index of investing in the new equipment, ignoring taxes. Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4). b. Should Pete's Paving purchase the machine based on your answers to part (a) c. Compute the payback period for the investment in the new equipment. (Ignore Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4). Yes No years d. Rounding to the nearest whole percentage, compute the internal rate of return for the equipment investment. %

Cornerstones of Cost Management (Cornerstones Series)
Cornerstones of Cost Management (Cornerstones Series)
4th Edition
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Don R. Hansen, Maryanne M. Mowen
Chapter3: Cost Behavior
Section: Chapter Questions
Problem 13E
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NPV; PI; payback; IRR Pete's Paving provides custom paving of sidewalks and driveways. One of the most labor-intensive aspects of the paving operation is preparing and mixing materials. Sharon Guillon, corporate engineer, has found new computerized equipment to mix (and monitor the mixing of) materials. According to information received by Guillon, the equipment's cost is $580,000 and has an expected life of eight years. If purchased, the new equipment would replace manually operated equipment. Data relating to the existing and replacement mixing equipment follow. Original cost Present book value Existing Equipment $56,000 $32,000 Annual cash operating costs $180,000 Fair value $12,000 Fair value in eight years Remaining useful life $0 8 years Replacement Equipment $580,000 $36,000 Cost Annual cash operating costs Fair value in eight years Useful life $0 8 years a. Assume that the company's cost of capital is 10 percent, which is to be used in discounted cash flow analysis. (1) Compute the net present value of investing in the new equipment, ignoring taxes. Note: Round your answer to the nearest whole dollar. $ (2) Compute the profitability index of investing in the new equipment, ignoring taxes. Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4).
Transcribed Image Text:NPV; PI; payback; IRR Pete's Paving provides custom paving of sidewalks and driveways. One of the most labor-intensive aspects of the paving operation is preparing and mixing materials. Sharon Guillon, corporate engineer, has found new computerized equipment to mix (and monitor the mixing of) materials. According to information received by Guillon, the equipment's cost is $580,000 and has an expected life of eight years. If purchased, the new equipment would replace manually operated equipment. Data relating to the existing and replacement mixing equipment follow. Original cost Present book value Existing Equipment $56,000 $32,000 Annual cash operating costs $180,000 Fair value $12,000 Fair value in eight years Remaining useful life $0 8 years Replacement Equipment $580,000 $36,000 Cost Annual cash operating costs Fair value in eight years Useful life $0 8 years a. Assume that the company's cost of capital is 10 percent, which is to be used in discounted cash flow analysis. (1) Compute the net present value of investing in the new equipment, ignoring taxes. Note: Round your answer to the nearest whole dollar. $ (2) Compute the profitability index of investing in the new equipment, ignoring taxes. Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4).
b. Should Pete's Paving purchase the machine based on your answers to part (a) c. Compute the payback period for the investment in the new equipment. (Ignore Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4). Yes No years d. Rounding to the nearest whole percentage, compute the internal rate of return for the equipment investment. %
Transcribed Image Text:b. Should Pete's Paving purchase the machine based on your answers to part (a) c. Compute the payback period for the investment in the new equipment. (Ignore Note: Round your answer to one decimal place (i.e. round 4.3555 to 4.4). Yes No years d. Rounding to the nearest whole percentage, compute the internal rate of return for the equipment investment. %
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