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:

	Present Truck			New Truck
Purchase cost new	$	23,000		$	28,000
Remaining book value	$	10,000			-
Overhaul needed now	$	9,000			-
Annual cash operating costs	$	11,500		$	8,000
Salvage value-now	$	5,000			-
Salvage value-five years from now	$	4,000		$	4,000

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 9% discount rate.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate

discount factor(s) using tables.

equired:
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.)

	Now	1	2	3	4	5
Keep the truck:
Overhaul needed now
Annual Operating Costs
Salvage Value (old)
Total Cash Flows
Discount Factor 9%
Present Value
Net present Value
Purchase the new truck:
Purchase new truck
Salvage Value (old)
Annual Operating Costs
Salvage Value (new)
Total Cash flows
Discount Factor 9%
Present Value
Net Present Value

Should Bilboa Freightlines keep the old truck or purchase the new one?

(a) Keep the old truck

or

(b) Purchase the new truck