Question

Billboa Freightlines, S.A. of Panama, has a small truck that it uses for Intracity deliveries. The truck is worn out and must be eſther overhauled or replaced with a new truck. The company has assembled the following information: Purchase cost (new) Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from Present New Truck Truck $28,000 $30,000 $15,000 $14,000 $14,500 $13,000 $10,000 $ 9,000 $12,000 non 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 13% discount rate. Click here to view Exhibit 128-1 and Exhibit 128-2, 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 Biboa Freight Ines keep the old truck or purchase the new one? Complete this question by entering your answers in the tabs below. Required Required Required 2 3 What is the net present value of the "purchase the new truck" alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Net present value < Required 1 Required 3 >

thank you!

Answer 1

(1) Keep the Old Truck :-

Net Present Value = ($60110)

Explanations :-

Keep the old truck
Particulars	Now	1	2	3	4	5
Overhaul needed now	($14,000)
Annual operating costs		($14,500)	($14,500)	($14,500)	($14,500)	($14,500)
Salvage value (Old)						$9,000
Total cash flows	($14,000)	($14,500)	($14,500)	($14,500)	($14,500)	($5,500)
Discount factor 13%	1	0.885	0.783	0.693	0.613	0.543
Present Value	($14,000)	($12,833)	($11,354)	($10,049)	($8,889)	($2,987)
Net Present Value	($60,110)

(2) Purchase the New Truck :-

Net Present Value = ($67205)

Purchase the New Truck
Particulars	Now	1	2	3	4	5
Purchase new truck	($38,000)
Salvage value (old)	$10,000
Annual operating costs		($13,000)	($13,000)	($13,000)	($13,000)	($13,000)
Salvage value (new)						12000
Total cash flows	($28,000)	($13,000)	($13,000)	($13,000)	($13,000)	($1,000)
Discount factor 13%	1	0.885	0.783	0.693	0.613	0.543
Present Value	($28,000)	($11,505)	($10,179)	($9,009)	($7,969)	($543)
Net Present Value	($67,205)

(3) Bilboa freightlines should keep the old truck.