Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intraci
ID: 2460961 • 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(L) New Truck(R)
Purchase cost new........................................ $21,000 $30,000
Remaining book value................................. $11,500
Overhaul needed now.................................. $7,000
Annual cash operating costs....................... $10,000 $6,500
Salvage value-now....................................... $9,000
Salvage value-five years from now............ $1,000 $4,000
If the company keeps and overhauls its present day 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 diesel-operated, 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.
Required:
Should Bilboa Freightliens keep the old truck or purchase the new one? Use the total-cost and incremental cost approach on Excel to net present value in making your decision. Use and show the Logic IF statements for both approaches necessary to determine the conclusion. Round to the nearest whole dollar.
Explanation / Answer
The company should keep the old truck.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.