Award: $10\mathrm{.}00$ points

Bilboa Freightlines, S$.$A$.$ of Panama has a small truck that it uses for local deliveries. The truck is in bad repair 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$)$:

Purchase cost new

Remaining book value

Overhaul needed now

Annual cash operating costs

Salvage value now

Salvage value eight years from now

$\backslash$table$[[\backslash$table$[[$Present$],[$Truck$]],\backslash$table$[[$New$],[$Truck$]]],[$$$,49,000,$$$,68,500],[,34,000,,],[,14,500,,],[,20,500,,14,500],[,19,500,,],[,5,000,,8,000]]$

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$-$fuelled, 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 $10-1$ and Exhibit $10-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

$1-$a$.$ Determine the present value of net cash flows using the total$-$cost approach. $($Negative amounts should be indicated with a minus sign. Round discount factor$($s$)$ to $3$ decimal place.$)$

$\backslash$table$[[,\backslash$table$[[$Present Value of Net$],[$Cash Flows$]]],[$Purchase the new truck,$],[$Keep the old truck,$]]$

$1-$b$.$ Should Bilboa Freightlines keep the old truck or purchase the new one?

Purchase the new truck

Keep the old truck

$2.$ Using the incremental$-$cost approach, determine the net present value in favor of $($or against$)$ purchasing the new truck? $($Negative amounts should be indicated with a minus sign. Round

discount factor$($s$)$ to $3$ decimal place.$)$

Net present value

References