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. (Panama uses the U.S. dollar as its currency):

If the company keeps and overhauls its present delivery truck, then the truck will be usable for eight more years. If a new truck is purchased, it will be used for eight 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.

Required:

(Ignore income taxes.)

1.         Should Bilboa Freightlines keep the old truck or purchase the new one? Use the total-cost approach to net present value in making your decision. Round to the nearest whole dollar.

2.         Redo (1) above, this time using the incremental-cost approach.

Transcribed Image Text:

Present New Truck Truck Purchase cost new $21,000 S30,000 Remaining book value $11,500 S7,000 Overhaul needed now Annual cash operating costs S10,000 $6,500 Salvage value-new S0.000 Salvage value-eight years from now S1,000 S4,000