Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intraci
ID: 2393920 • Letter: B
Question
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information: Present Truck S 36, 000 s 23,000 $ 22, 000 s 17,500 s 12,000 S 15, 000 Truck 48, 000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now $ 16,000 $ 6,000 If the company keeps and overhauls its present delivery truck, then the truck will be usable for five more years. If a new truck is purchased, it will be used for five years, after which it will be traded in on another truck. The new truck would be diesek-operated. resulting in a substantial reduction in annual operating costs, as shown above. The company computes depreciation on a straight-ine basis. All investment projects are evaluated using a 99Tdiscount rate. Click here to view Exhibit 1381 and Exhibit 138-2, to determine the appropriate discount factorís) using tables Required 1. What is the net present value of the "keep the old truck" alternative? 2. What is the net present value of the "purchase the new truck" alternative? 2 Shoiuled Rilhoa Freinhtlines keen the nird tnirk or airehase the new one?Explanation / Answer
PVAF @ 9% for 5 years = 3.8897
PVIF for 5th year @ 9% = 0.6499
(1) NPV (Keep the old Truck) :-
Overhaul cost
-22000
Present value of annual cash operating cost (17500 * 3.8897)
-68070
Present value of Salvage value (15000 * 0.6499)
9749
-80320
(2) Purchase the new Truck :-
Purchase cost
-48000
Present value of annual cash operating cost (16000 * 3.8897)
-62235
Present value of Salvage value (6000 * 0.6499)
3899
Salvage value of Present Truck
12000
-94336
(3) Bilboa Freightlines needs to keep the old Truck
Overhaul cost
-22000
Present value of annual cash operating cost (17500 * 3.8897)
-68070
Present value of Salvage value (15000 * 0.6499)
9749
-80320
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.