Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intraci
ID: 2480996 • 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:
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 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 7% discount rate.
1. Use the total-cost approach to net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)
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:
Explanation / Answer
Now 1 2 3 4 5 Keep the old truck: A Overhaul needed now -27000 Annual operating costs -20000 -20000 -20000 -20000 -20000 Salvage value (old) 14000 Total cash flows -27000 -20000 -20000 -20000 -20000 -6000 Discount factor 7% 1 0.934 0.873 0.816 0.763 0.713 Present value -27000 -18680 -17460 -16320 -15260 -4278 Net present value -98998 Purchase the new truck: B Purchase new truck -48000 Salvage value (old) 10000 Annual operating costs -18500 -18500 -18500 -18500 -18500 Salvage value (new) 12000 Total cash flows -38000 -18500 -18500 -18500 -18500 -6500 Discount factor 7% 1 0.934 0.873 0.816 0.763 0.713 Present value -38000 -17279 -16150.5 -15096 -14115.5 -4634.5 Net present value -105276 Depreciation A (28000+27000) 55000 11000 11000 11000 11000 11000 Depreciation B (48000) 48000 9600 9600 9600 9600 9600 Depreciation will not be am afecting factor since it is not a cash item
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