Question
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
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 | $ | 33,000 | $ | 40,000 | ||
Remaining book value | $ | 24,000 | - | |||
Overhaul needed now | $ | 23,000 | - | |||
Annual cash operating costs | $ | 22,000 | $ | 20,500 | ||
Salvage value-now | $ | 7,000 | - | |||
Salvage value-five years from now | $ | 25,000 | $ | 14,000 | ||
|
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 8% 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.) |
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