Question

Problem 13-28 Net Present Value [LO13-2]

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 16% discount rate.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: 1-a. Use the total-cost approach to net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.)

Answer 1

Particulars Keep old truck Overhaul needed now Annual operating cost Salvage value (old) Total cash flows Discounting factor 16% Present value Net present value Now 2 -10000 -10000 -10000 -10000 -10000 1000 9000 0.476 -4284 10000 10000 0.743 -7430 10000 0.641 6410 -10000 0.552 5520 0.862 7000 -39264 New truck Now 4 Purchase new truck Salvage value (old) Annual operating cost Salvage value (new) Total cash flows Discounting factor 16% Present value Net present value -30000 6,500 6,500 6,500 6,500 6,500 21000 6500 0.862 5603 6500 0.743 -4829.5 6500 0.641 -4166.5 6500 2500 0.476 -1190 0.552 21000 -40377