Petes Paving provides custom paving of sidewalks and driveways. One of the most labor-intensive aspects of the

Question:

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 8 years. If purchased, the new equipment would replace manually operated equipment. Data relating to the old and new mixing equipment follow.

Old Equipment

Original cost ............ $56,000

Present book value ........... $32,000

Annual cash operating costs ......$150,000

Current market value ......... $12,000

Market value in 8 years ........ $0

Remaining useful life ......... 8 years

New Equipment

Cost .................$580,000

Annual cash operating costs ....... $30,000

Market value in 8 years ........ $0

Useful life .............. 8 years

a. Assume that the company’s cost of capital is 10 percent, which is to be used in discounted cash flow analysis. Compute the net present value and profitability index of investing in the new equipment. Should Pete’s Paving purchase the machine? Why or why not? (Ignore taxes.)

b. Compute the payback period for the investment in the new machine. (Ignore taxes.)

c. Rounding to the nearest whole percentage, compute the internal rate of return for the equipment investment.

Net Present Value
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