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):

	Present Truck	New Truck
Purchase cost new	$	41,000		$	56,500
Remaining book value		26,000			-
Overhaul needed now		10,500			-
Annual cash operating costs		12,500			10,500
Salvage value now		15,500			-
Salvage value eight years from now		3,400			6,400

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. And based on this rate the factors are listed below.

The factor for annual cash operating costs (1a) as well as savings in annual operating costs (2) is 4.344. Therefore the costs will be mulitplied by this number to calculate the number for 8 years for question

While the factor for the salvage for the new truck as well as for the old truck is 0.305.

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.)

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

1-b. multiple choice

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 = ?

\begin{tabular}{|l|c|} \hline & \begin{tabular}{c} Present Value of Net \\ Cash Flows \end{tabular} \\ \hline Purchase the new truck & \\ \hline Keep the old truck & \\ \hline \end{tabular}