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 | $ | 30,000 | $ | 39,000 | ||
Remaining book value | $ | 17,000 | - | |||
Overhaul needed now | $ | 16,000 | - | |||
Annual cash operating costs | $ | 15,500 | $ | 14,000 | ||
Salvage value-now | $ | 9,000 | - | |||
Salvage value-five years from now | $ | 8,000 | $ | 10,000 | ||
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 9% 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?
1. Computation of NPV of Keep The truck | ||||||
Now | 1 | 2 | 3 | 4 | 5 | |
Keep the old truck: | ||||||
Overhaul needed now | -$16,000 | |||||
Annual operating costs | -$15,500 | -$15,500 | -$15,500 | -$15,500 | -$15,500 | |
Salvage value (old) | $8,000 | |||||
Total cash flows | -$16,000 | -$15,500 | -$15,500 | -$15,500 | -$15,500 | -$7,500 |
Discount facr 9% | 1.000 | 0.917 | 0.842 | 0.772 | 0.708 | 0.650 |
Present value | -$16,000 | -$14,220 | -$13,046 | -$11,969 | -$10,981 | -$4,874 |
Net present value | -$71,090 | |||||
2 | ||||||
2. Computation of NPV of Purchase of New The truck | ||||||
Now | 1 | 2 | 3 | 4 | 5 | |
Purchase new truck | -$39,000 | |||||
Salvage value (old) | $9,000 | |||||
Annual operating costs | -$14,000 | -$14,000 | -$14,000 | -$14,000 | -$14,000 | |
Salvage value (new) | $10,000 | |||||
Total cash flows | -$30,000 | -$14,000 | -$14,000 | -$14,000 | -$14,000 | -$4,000 |
Discount facr 9% | 1.000 | 0.917 | 0.842 | 0.772 | 0.708 | 0.650 |
Present value | -$30,000 | -$12,844 | -$11,784 | -$10,811 | -$9,918 | -$2,600 |
Net present value | -$77,956 |
3. Bilboa Freightlines should keep the old truck |
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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: New Truck $ 49,000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $ 36,000 $ 24,000 $ 23,000 $ 18,000 $ 13,000 $ 10,000 $ 16,500 $ 8,000...
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: 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: New Truck $ 30,000...
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: New Truck $ 38,000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $ 28,000 $ 15,000 $ 14,000 $ 14,500 $ 10,000 $ 9,000 $ 13,000 $ 12,000...
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...
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: New Truck $ 30,000 Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $ 21,000 $ 11,500 $ 7,000 $ 10,000 $ 9,000 $ 1,000 $ 6,500 $ 4,000...
Bilboa Freightlines, SA, of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be ether overhauled or replaced with a new truck. The company has assembled the following information 28,889 15,00 538,00 $ Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value- Salvage value-five years from now $ 14,5ee $ 13, $ 18, $9.99 $123 If the company keeps and overhauls its present delivery truck...
Check my work 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: New Truck $ 36,000 points Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $ 31,000 $ 24,000 $ 23,000 $ 22,000 $ 5,000 $ 20,000...
Check my work 3 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 Nev Truck points Truck s 24,000$ 27,000 $ 8,000 $ 7,000 s 11,000 6000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costa Salvage value-now Salvage value-five years from now eBook $ 2,000...
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: New Truck $ 37,000 Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $ 29.000 $ 16,000 $ 15,000 $ 15,000 $ 8.000 $ 7,000 $ 12,500 $ 11,000...
Balboa 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 New Truck $ 50,00 3.30 points awarded Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value - now Salvage value-five years from now Present Truck $ 35,889 $ 25, eee $ 24,000 $ 18,500 $ 15,899...