Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intraci

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 New Truck Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now $ 26,000 34,000 s 13,000 12,000 $13,500 11,000 $ 8,000 $ 7,000 7,000 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 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 10% discount rate Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) 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? 3. Should Bilboa Freightlines keep the old truck or purchase the new one? Complete this question by entering your answers in the tabs below Required1Required 2 Required 3 What is the net present value of the "keep the old truck" alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value

Explanation / Answer

NPV-Keep the old truck Annual operating cost -13500 Annuity factor 10% for 5 years 3.7908 Present value of outflows -51175.8 Add: Overhauling cost -12000 Total Present value of outflows -63176 Less: salvage value at the end of 5 years 4346.3 ($ 7000*0.6209) NPV-Keep the old truck -58829.7 NPV-Puchase of new truck: Annual operating cost -11000 Annuity factor 10% for 5 years 3.7908 Present value of outflows -41698.8 Add: Initail Investment net of salvage -26000 (34000-8000) Total Present value of outflows -676999 Less: salvage value at the end of 5 years 4346.3 ($ 7000*0.6209) NPV-Keep the old truck -672653 The Companny shall KEEP THE OLD TRUCK

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