Question

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 $ 19,500 eBook $ 12,000 Print References 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 7% discount rate. Click here to view Exhibit 12B-1 and Exhibit 12B-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. Required 1 Required 2 Required 3

Answer 1

Ans:

		Year
		0	1	2	3	4	5
1	Keep the old truck
	Overhaul needed now	-23000
	Annual operating costs		-22000	-22000	-22000	-22000	-22000
	Salvage value (old)(after 5 years)						20000
	Total cash flows	-23000	-22000	-22000	-22000	-22000	-2000
	Discount factor (i=7%)	1	0.935	0.873	0.816	0.763	0.713
	Present Value	-23000	-20570	-19206	-17952	-16786	-1426
	Net present value	-98940
2	Purchase the new truck
	Purchase new truck	-36000
	Salvage value (old)(before 5 Years)						5000
	Annual operating costs		-19500	-19500	-19500	-19500	-19500
	Salvage value (new)						12000
	Total cash flows	-36000	-19500	-19500	-19500	-19500	-2500
	Discount factor (i=7%)	1	0.935	0.873	0.816	0.763	0.713
	Present Value	-36000	-18233	-17024	-15912	-14879	-1782.5
	Net present value	-103829
3. Bilboa should keep the old truck since its net present value is higher than the net present value .
of purchasing the new truck.