Week 5 Assignment
As illustrated by the outcomes of comparing New Backhoe with the Old Backhoe, the Old Backhoe needs to be overhauled since it shows to have a higher current value compared to the New Backhoe.
The payback period for the New Backhoes will be calculated by:
Payback period= Original investment/payback
= $200,000/$43900= 4.6 years.
For the Old Backhoes:
= $55,000/ $30,425 = 1.8 years.
The organization needs to overhaul the old system since it is showing to have a shorter payback period and the original outlay of the investors is appearing to be at stake within the short period.
The profitability of the New Backhoes will be calculated as follows:
Profitability Index = PV of Future Cash Flows / Original Investment
= $100,893/ $200,000 = ½ or 0.5
The profitability margin of Old Backhoes on the other hand will be:
= $127,952/ $55,000= 2.3
The conclusion is therefore that the Old Backhoe needs to be overhauled since its profitability is relatively higher than that of the New Backhoe.
Of course there are physical paybacks of overhauling the Old Backhoe. The reason for this is that the current employees are already familiar on how to use the system and will therefore require no training. The only thing they need to do is to familiarize themselves on its functionality to increase productivity.
From the outcomes acquired from making comparison between the current value, payback period along with the profitability index of the Old and New Backhoes, I would offer the company the recommendation that they should overhaul the old system. The reason for this is that the Old Backhoe is cheap to overhaul instead of procuring a New Backhoe since the new one will demand a higher original and training cost to be incorporated fully into the organization.