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Waterways puts much emphasis on cash flow when it plans for capital investments. The company chose its discount rate of 8% based on the rate of return it must pay its owners and creditors. Using that rate, Waterways then uses different methods to determine the best decisions for making capital outlays. This year Waterways is considering buying five new backhoes to replace the backhoes it now has. 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. The following information is available to use in deciding whether to purchase the new backhoes.

		Old Backhoes		New Backhoes
Purchase cost when new		$90,000		$202,784
Salvage value now		$41,600
Investment in major overhaul needed in next year		$55,510
Salvage value in 8 years		$15,000		$90,000
Remaining life		8 years		8 years
Net cash flow generated each year		$30,500		$43,800

Calculate the internal rate of return factor for the new and old blackhoes. (Round answers to 5 decimal places, e.g. 5.27647.)

		New Backhoes		Old Backhoes
IRR Factor

(4) Comparing the internal rate of return for each choice to the required 8% discount rate.

Waterways should buy New Backhoesretain Old Backhoes equipment.

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