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Problem 1 2 - 2 8 ( Algo ) Net Present Value Analysis [ LO 1 2 - 2 ] Bilboa Freightlines, S . A
Problem Algo Net Present Value Analysis LO
Bilboa Freightlines, SA 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 $ $
Remaining book value $
Overhaul needed now $
Annual cash operating costs $ $
Salvage valuenow $
Salvage valuefive years from now $ $
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 dieseloperated, resulting in a substantial reduction in annual operating costs, as shown above.
The company computes depreciation on a straightline basis. All investment projects are evaluated using a discount rate.
Click here to view Exhibit B and Exhibit B to determine the appropriate discount factors using tables.
Required:
What is the net present value of the keep the old truck alternative?
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