Problem $12-28($Algo$)$ Net Present Value Analysis $[$LO$12-2]$

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 $ $38,000$ $ $48,000$

Remaining book value $ $28,0000$

Overhaul needed now $ $27,0000$

Annual cash operating costs $ $20,000$ $ $18,500$

Salvage value$-$now $ $10,0000$

Salvage value$-$five years from now $ $14,000$ $ $12,000$

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 $7\%$ discount rate.

Click here to view Exhibit $12$B$-1$ and Exhibit $12$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

$1.$ What is the net present value of the $$keep the old truck$$ alternative?

$2.$ What is the net present value of the $$purchase the new truck$$ alternative?

$3.$ Should Bilboa Freightlines keep the old truck or purchase the new one?