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	$	27,000		$	36,000
Remaining book value	$	14,000			-
Overhaul needed now	$	13,000			-
Annual cash operating costs	$	14,000		$	11,500
Salvage value-now	$	9,000			-
Salvage value-five years from now	$	5,000		$	8,000

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 13% discount rate.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.

Required:

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 old truck:
Overhaul needed now
Annual operating costs
Salvage value (old)
Total cash flows
Discount factor 13%
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 13%
Present value
Net present value