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	$ 25,000	$ 30,000
Remaining book value	$ 11,000	-
Overhaul needed now	$ 11,000	-
Annual cash operating costs	$ 12,500	$ 10,000
Salvage value-now	$ 5,000	-
Salvage value-five years from now	$ 4,000	$ 5,000

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 11% discount rate.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.