Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intraci
ID: 2534646 • 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 11% 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?
PresentTruck New
Truck Purchase cost new $ 31,000 $ 39,000 Remaining book value $ 18,000 - Overhaul needed now $ 17,000 - Annual cash operating costs $ 16,000 $ 13,500 Salvage value-now $ 8,000 - Salvage value-five years from now $ 7,000 $ 8,000
Explanation / Answer
Keep the old truck Now 1 2 3 4 5 Overhaul -17000 Annual operating cost -16000 -16000 -16000 -16000 -16000 Salvage value (old) 7000 Total cash outflows T -17000 -16000 -16000 -16000 -16000 -9000 Discount factor D 1 0.901 0.812 0.731 0.659 0.593 Present value T*D -17000 -14416 -12992 -11696 -10544 -5337 NPV total of present value -71985 Purcahse of new truck Purchase price -39000 Salvage value (old) 8000 Annual operating cost -13500 -13500 -13500 -13500 -13500 Salvage value (new) 8000 Total cash outflows T -31000 -13500 -13500 -13500 -13500 -5500 Discount factor D 1 0.901 0.812 0.731 0.659 0.593 Present value T*D -31000 -12164.0 -10962.0 -9869.0 -8897.0 -3262.0 NPV total of present value -76154 Ans 1 NPV of old truck ($71,985) ans 2 NPV of new ($76,154) ans 3 should keep truck as negative NPV is less in keeping the truch than purchasing it If any doubt please comment. If satisfied you can rate the answer
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