Shoals Corporation

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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.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.

 

 

Sample Solution

The degradation of “The Sportsman’s Paradise” hurts not only the environment, but also the economy. According to a 2012 study conducted by the Fisheries Economics of the U.S, the Gulf of Mexico marine industry employed nearly 20 million people across Alabama, Louisiana, Texas, Mississippi, and Florida. The commercial fishing location quotient (CFLQ) for Louisiana topped the region at 1.38. This basically means that the level of commercial fisheries employment in Louisiana is almost 1.5 times higher than the nationwide average. Louisiana’s landings revenue topped the southeast at $331 million, almost twice as much as the runner-up, Texas. Just to put into perspective the economic impact of fishing trips on the state, recreational fishing trips impacted Louisiana at $4 trillion, with total trip expenditures topping $2.8 billion. The Mississippi River Delta plays a major role in the economies of Louisiana and Mississippi; once this wildlife refuge becomes used up, people all across the southeast that rely on the marine economy will bear the negative effects, but not nearly as much as the wildlife that calls the Delta home.

Every winter, millions of birds fly down the Mississippi and Central flyways, on their way to warmer temperatures across the Gulf of Mexico. Ducks, geese, and other waterfowl rely on the Delta’s food-rich habitats, whether it be preparing for the 600-mile journey across the Gulf in the fall or recuperating after the flight back north in the spring. Therefore, the destruction of the Delta doesn’t only affect its yearlong residents; waterfowl hunters as far north as Canada feel the effects of the Paradise’s degradation. The entire North American duck hunting community relies on the Mississippi River Delta, as it vanishes before our blind eyes.

The spotted sea trout, commonly known as the speckled trout, is arguably the most widely sought after aquatic species that inhabits the Delta. Even though the speckled trout is a migrating species, they crowd the w

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