Bilboa Freightlines, S.A. of Panama has a small truck that it uses for local del
ID: 2432396 • Letter: B
Question
Bilboa Freightlines, S.A. of Panama has a small truck that it uses for local deliveries. The truck is in bad repair and must be either overhauled or replaced with a new truck. The company has assembled the following information (Panama uses the U.S. dollar as its currency):
If the company keeps and overhauls its present delivery truck, then the truck will be usable for eight more years. If a new truck is purchased, it will be used for eight years, after which it will be traded in on another truck. The new truck would be diesel-fuelled, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 16% discount rate.
Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.
Determine the present value of net cash flows using the total-cost approach. (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3 decimal place.)
Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the new truck? (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3 decimal place.)
Bilboa Freightlines, S.A. of Panama has a small truck that it uses for local deliveries. The truck is in bad repair and must be either overhauled or replaced with a new truck. The company has assembled the following information (Panama uses the U.S. dollar as its currency):
Explanation / Answer
Solution 1a:
Solution 1b:
Present value of cash outflows under keeping old truck is lower than present value of cash outlflow in buying new truck, therefore company should keep the old truck.
Solution 2:
Total cost approach to Net Present Value - Bilboa Freighlines Particulars Now 1 2 3 4 5 6 7 8 Keep the old truck: Overhaul needed now -$8,000.00 Annual operating costs -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 Salvage value (Old) $1,000.00 Total cash flows -$8,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$11,000.00 -$10,000.00 Discount factor 16% 1.000 0.862 0.743 0.641 0.552 0.476 0.410 0.354 0.305 Present Value -$8,000.00 -$9,482.00 -$8,173.00 -$7,051.00 -$6,072.00 -$5,236.00 -$4,510.00 -$3,894.00 -$3,050.00 Net Present Value -$55,468.00 Purchase the New Truck: Purchase new truck -$55,000.00 Salvage value (old) $14,000.00 Annual operating costs -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 Salvage value (new) $4,000.00 Total cash flows -$41,000.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$8,500.00 -$4,500.00 Discount factor 10% 1.000 0.862 0.743 0.641 0.552 0.476 0.410 0.354 0.305 Present Value -$41,000.00 -$7,327.00 -$6,315.50 -$5,448.50 -$4,692.00 -$4,046.00 -$3,485.00 -$3,009.00 -$1,372.50 Net Present Value -$76,695.50Related Questions
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