Question

Bilboa Freightlines, SA, 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 Now Truck $50,000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $ 35,000 $ 25,000 $ 24,000 $ 18,500 $ 15,000 $ 11,000 $ 18,000 $ 9,000 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. nces The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 13% 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?

Answer 1

1
	Now	1	2	3	4	5
Keep the old truck:
Overhaul needed now	-24000
Annual operating costs		-18500	-18500	-18500	-18500	-18500
Salvage value (old)						11000
Total cash flows	-24000	-18500	-18500	-18500	-18500	-7500
Discount factor 13%	1	0.885	0.783	0.693	0.613	0.543
Present value	-24000	-16372.5	-14485.5	-12820.5	-11340.5	-4072.5
Net present value	-83092
2
Purchase the new truck:
	Now	1	2	3	4	5
Purchase new truck	-50000
Salvage value (old)	15000
Annual operating costs		-18000	-18000	-18000	-18000	-18000
Salvage value (new)						9000
Total cash flows	-35000	-18000	-18000	-18000	-18000	-9000
Discount factor 13%	1	0.885	0.783	0.693	0.613	0.543
Present value	-35000	-15930	-14094	-12474	-11034	-4887
Net present value	-93419
3
Bilboa Freightlines should keep the old truck