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

In the mid-fifties, Pakistan made a small volume of trade with the Baghdad pact countries and with some other Middle Eastern countries, such as Afghanistan, Saudi Arabia, Egypt and Bahrain. After that in the late fifties, between the Baghdad Pact countries, Iran’s trade with Pakistan was the largest of all, with Iraq and Turkey occupying the second and third respectively.
Visit of Turkish Trade Team in Pakistan 1959

However, by the beginning of the sixties, Pakistan and Turkey began searching for avenues of expanding trade. A Turkish trade team visited Karachi in October 1959 and in a joint communiqu?? announced that there were ‘possibilities of development of trade’ between Pakistan and Turkey and further official meetings were expected to take place in near future ‘for achieving some positive results’ in this respect. At that time the Pakistan commerce Minister noted with regret at a press conference in Istanbul on 15 October 1959, trade between two countries was negligible with a balance of about two million rupees in favor of Pakistan (Ali, 2001).

Facts behind Formation of RCD

The three countries Iran, Pakistan and Turkey may be regarded as belonging to distant cultural area. They are non Arab and the Turko-Persian culture dominates the lives of the people. Thus besides Islam they have many common bond between them. They have been united under the Ottoman Empire and had common political thinkers, historians, writers and poets. All the three states were the members of CENTO and their policies were pro-west. If we analyze their economic needs in the early sixties, all three were moving towards industrialization and modernization. Their economic needs and goals were similar in the beginning of sixties. They disenchanted with the west and began to looking for new avenues. Turkey was not happy over the issue of Turkish Cypriots. In Iran there was in evidence a trend towards national assertion, and country had sought to lessen its embroilment in the Russo-American conflict. Iran on account of cut in economic assistance too, and Pakistan was disenchanted because of flow of US arms to India after Sino-India border conflict (Hasan, 1964).

Creation of RCD

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