Accounting/Economics Final © John Joseph Crump.
Question # 00095756
Posted By:
Updated on: 08/22/2015 11:06 AM Due on: 09/21/2015
Jane Doe has asked for your help in selecting new equipment for purchase. She has decided to purchase a new track hoe and has narrowed the selection to two competitors. Track Hoe #1 costs $100,000 and has an hourly operating cost of $31.00 and a salvage value of $35,000 at the end of three operating seasons (November 2015 not December 2015). The Track Hoe #2 costs $65,000 and has an hourly operating cost of $36.00 and no salvage value after 3 operating seasons. A track hoe operator costs $29.00 per hour of operation and works on other tasks when the track hoe is not in use. With either track hoe, revenue will be $95.00 per billable hour. Based on experience, Big Stick expects to use the new track hoe for 1,200 billable hours per year. Since the company is located in Vermont, the track hoe normally is only used for 8 months each year (April through November), and the related Excel workbook specifies the expected distribution of billable hours over those 8 months. Big Stick assumes that it can dispose of Track Hoe #1 for the salvage value at the end of the last month in the 2015 construction season. They expects no inflation. Dollar values should be constant over the next 3 years. Because the track hoe will not be needed until April of 2013, they plan to close the purchase March 31, 2013 and to take delivery the next business day. Big Stick’s cost of capital is 7.5%. The Board of Directors demands a 5% profit margin. Recently, Big Stick personnel have engaged in extended discussions regarding the decision tools to use in comparing alternatives such as these. The company needs a respected and impartial outside party to settle this debate and to advise them on techniques for such financial decisions. Therefore, President Jane is willing to pay a steep consulting fee for your financial advice in this situation. She wants these: Net Present Value, Future Worth, Rate of Return or Internal Rate of Return, Payback without interest, and Payback with interest. To score points with President Jane (and you do want her business), you need to complete the spreadsheet and provide solutions in each highlighted cell.
Accounting/Economics Final
© John Joseph Crump. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means electronic,
mechanical, photocopying, recording or otherwise without express
permission from John Joseph Crump. Permission will be granted
readily, but you must ask.
Rubric (50 points possible)
points possible:
Method 1
10
Method 2
10
Method 3
10
0 points: Absent
4 point: Incorrect approach in more than one spot
6 points: Incorrect approach, incorrect solution
8 points: Mostly-correct approach, incorrect solution
10 points: Correct approach, correct solution
Method 4
10
Method 5
10
Financial Comparison of Track Hoe #1 with Track Hoe #2
% or Unit
Price
3 Year
($ / Hr)
Total
Start
2013
Sub-Tot
2014
Sub-Tot
End
2015
Sub-Tot
Months à
Jan-13
0
1
2
3
4
5
6
7
8
9
10
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
11
12
Feb-14 Mar-14
13
14
15
Apr-14
May-14
Jun-14
Data For Both Track Hoes
Billable Hours of Operation
3600
1200
1200
1200
50
100
200
200
200
200
150
100
50
100
200
Revenues
Track Hoe Operation
$95.00 $342,000.000
$114,000.000
$114,000.000
$114,000.000
$0.000
$0.000
$0.000 $4,750.000
$9,500.000 $19,000.000 $19,000.000 $19,000.000 $19,000.000 $14,250.000 $9,500.000
$0.000
$0.000
$0.000
$0.000 $4,750.000 $9,500.000 $19,000.000
Costs
Track Hoe Operation
Operator
Total Costs
$31.00 $111,600.000
$29.00 $104,400.000
$60.000 $216,000.000
$37,200.000
$34,800.000
$72,000.000
$37,200.000
$34,800.000
$72,000.000
$37,200.000
$34,800.000
$72,000.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000 $1,550.000
$0.000 $1,450.000
$0.000 $3,000.000
$3,100.000
$6,200.000
$6,200.000
$6,200.000
$6,200.000
$2,900.000
$5,800.000
$5,800.000
$5,800.000
$5,800.000
$6,000.000 $12,000.000 $12,000.000 $12,000.000 $12,000.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000 $1,550.000 $3,100.000
$6,200.000
$0.000 $1,450.000 $2,900.000
$5,800.000
$0.000 $3,000.000 $6,000.000 $12,000.000
MARR and Monthly Discount Factors
Annual effective rate
12.5%
Monthly effective rate
Monthly discount factors
Track Hoe #1
Capital Values
Track Hoe Investment
Track Hoe Salvage
NCF
Cumulative Cash
Present Values
PVs of Monthly NCFs
Project Net -- NPV
IRR
Track Hoe #2
Capital Values
Track Hoe Investment
Track Hoe Salvage
Revenues
Track Hoe Operation
Costs
Track Hoe Operation
Operator
Total Costs
NCF
Cumulative Cash
Present Values
PVs of Monthly NCFs
Project Net -- NPV
IRR
$95.00
$36.00
$29.00
$4,650.000 $3,100.000
$4,350.000 $2,900.000
$9,000.000 $6,000.000
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Cum
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Amount
200
200
200
150
100
50
100
200
200
200
200
150
100
3600
$19,000.000 $19,000.000 $19,000.000 $14,250.000 $9,500.000
$0.000
$0.000
$0.000
$0.000 $4,750.000 $9,500.000 $19,000.000 $19,000.000 $19,000.000 $19,000.000 $14,250.000 $9,500.000
$0.000 $342,000.000
$6,200.000
$6,200.000
$6,200.000
$5,800.000
$5,800.000
$5,800.000
$12,000.000 $12,000.000 $12,000.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000 $1,550.000 $3,100.000
$6,200.000
$6,200.000
$6,200.000
$6,200.000
$0.000 $1,450.000 $2,900.000
$5,800.000
$5,800.000
$5,800.000
$5,800.000
$0.000 $3,000.000 $6,000.000 $12,000.000 $12,000.000 $12,000.000 $12,000.000
$0.000 $111,600.000
$0.000 $104,400.000
$0.000 $216,000.000
$4,650.000 $3,100.000
$4,350.000 $2,900.000
$9,000.000 $6,000.000
$4,650.000 $3,100.000
$4,350.000 $2,900.000
$9,000.000 $6,000.000
% or Unit
Price
3 Year
($ / Hr)
Start
2013
Total
Requested Valuation Methods
1. Net Present Value
TH1
TH2
2. Future Value
TH1
TH2
3. Monthly Rate of Return or Internal Rate of Return (IRR)
TH1
TH2
4. Payback without interest (number of months)
TH1
TH2
5. Payback with interest (number of months)
TH1
TH2
Final recommendation
TH1 or TH2?
Sub-Tot
2014
Sub-Tot
End
2015
Sub-Tot
Months à
Jan-13
0
1
2
3
4
5
6
7
8
9
10
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
11
12
Feb-14 Mar-14
13
14
15
Apr-14
May-14
Jun-14
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Cum
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Amount
© John Joseph Crump. All rights reserved. No part of this
publication may be reproduced, stored in a retrieval system, used in a
spreadsheet, or transmitted in any form or by any means electronic,
mechanical, photocopying, recording or otherwise without express
permission from John Joseph Crump. Permission will be granted
readily, but you must ask.
Rubric (50 points possible)
points possible:
Method 1
10
Method 2
10
Method 3
10
0 points: Absent
4 point: Incorrect approach in more than one spot
6 points: Incorrect approach, incorrect solution
8 points: Mostly-correct approach, incorrect solution
10 points: Correct approach, correct solution
Method 4
10
Method 5
10
Financial Comparison of Track Hoe #1 with Track Hoe #2
% or Unit
Price
3 Year
($ / Hr)
Total
Start
2013
Sub-Tot
2014
Sub-Tot
End
2015
Sub-Tot
Months à
Jan-13
0
1
2
3
4
5
6
7
8
9
10
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
11
12
Feb-14 Mar-14
13
14
15
Apr-14
May-14
Jun-14
Data For Both Track Hoes
Billable Hours of Operation
3600
1200
1200
1200
50
100
200
200
200
200
150
100
50
100
200
Revenues
Track Hoe Operation
$95.00 $342,000.000
$114,000.000
$114,000.000
$114,000.000
$0.000
$0.000
$0.000 $4,750.000
$9,500.000 $19,000.000 $19,000.000 $19,000.000 $19,000.000 $14,250.000 $9,500.000
$0.000
$0.000
$0.000
$0.000 $4,750.000 $9,500.000 $19,000.000
Costs
Track Hoe Operation
Operator
Total Costs
$31.00 $111,600.000
$29.00 $104,400.000
$60.000 $216,000.000
$37,200.000
$34,800.000
$72,000.000
$37,200.000
$34,800.000
$72,000.000
$37,200.000
$34,800.000
$72,000.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000 $1,550.000
$0.000 $1,450.000
$0.000 $3,000.000
$3,100.000
$6,200.000
$6,200.000
$6,200.000
$6,200.000
$2,900.000
$5,800.000
$5,800.000
$5,800.000
$5,800.000
$6,000.000 $12,000.000 $12,000.000 $12,000.000 $12,000.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000 $1,550.000 $3,100.000
$6,200.000
$0.000 $1,450.000 $2,900.000
$5,800.000
$0.000 $3,000.000 $6,000.000 $12,000.000
MARR and Monthly Discount Factors
Annual effective rate
12.5%
Monthly effective rate
Monthly discount factors
Track Hoe #1
Capital Values
Track Hoe Investment
Track Hoe Salvage
NCF
Cumulative Cash
Present Values
PVs of Monthly NCFs
Project Net -- NPV
IRR
Track Hoe #2
Capital Values
Track Hoe Investment
Track Hoe Salvage
Revenues
Track Hoe Operation
Costs
Track Hoe Operation
Operator
Total Costs
NCF
Cumulative Cash
Present Values
PVs of Monthly NCFs
Project Net -- NPV
IRR
$95.00
$36.00
$29.00
$4,650.000 $3,100.000
$4,350.000 $2,900.000
$9,000.000 $6,000.000
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Cum
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Amount
200
200
200
150
100
50
100
200
200
200
200
150
100
3600
$19,000.000 $19,000.000 $19,000.000 $14,250.000 $9,500.000
$0.000
$0.000
$0.000
$0.000 $4,750.000 $9,500.000 $19,000.000 $19,000.000 $19,000.000 $19,000.000 $14,250.000 $9,500.000
$0.000 $342,000.000
$6,200.000
$6,200.000
$6,200.000
$5,800.000
$5,800.000
$5,800.000
$12,000.000 $12,000.000 $12,000.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000
$0.000 $1,550.000 $3,100.000
$6,200.000
$6,200.000
$6,200.000
$6,200.000
$0.000 $1,450.000 $2,900.000
$5,800.000
$5,800.000
$5,800.000
$5,800.000
$0.000 $3,000.000 $6,000.000 $12,000.000 $12,000.000 $12,000.000 $12,000.000
$0.000 $111,600.000
$0.000 $104,400.000
$0.000 $216,000.000
$4,650.000 $3,100.000
$4,350.000 $2,900.000
$9,000.000 $6,000.000
$4,650.000 $3,100.000
$4,350.000 $2,900.000
$9,000.000 $6,000.000
% or Unit
Price
3 Year
($ / Hr)
Start
2013
Total
Requested Valuation Methods
1. Net Present Value
TH1
TH2
2. Future Value
TH1
TH2
3. Monthly Rate of Return or Internal Rate of Return (IRR)
TH1
TH2
4. Payback without interest (number of months)
TH1
TH2
5. Payback with interest (number of months)
TH1
TH2
Final recommendation
TH1 or TH2?
Sub-Tot
2014
Sub-Tot
End
2015
Sub-Tot
Months à
Jan-13
0
1
2
3
4
5
6
7
8
9
10
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
11
12
Feb-14 Mar-14
13
14
15
Apr-14
May-14
Jun-14
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
Cum
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Amount
-
Rating:
/5
Solution: Accounting/Economics Final © John Joseph Crump.