Payback with interest.
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.
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