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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
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 Present Truck New Truck $ 47,000 $ 65,500 32,000 13,500 18,500 13,500 18,500 4,600 7,600 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.) Purchase the new truck Keep the old truck Present Value of Net Cash Flows 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
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