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Problem 1 4 - 2 8 ( Algo ) Net Present Value Analysis [ LO 1 4 - 2 ] Bilboa Freightlines, S . A
Problem Algo Net Present Value Analysis LO
Bilboa Freightlines, SA of Panama, uses a truck for intracity deliveries that has worn out and must be overhauled or replaced. The company 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 overhauls its present delivery truck, then it will be usable for five more years. If a new truck is purchased, it will be used for five years and then traded in for another truck. The new truck would be dieseloperated, resulting in lower annual operating costs, as shown above.
The company computes depreciation on a straightline basis and uses 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?
What is the net present value of the purchase the new truck alternative?
Should Bilboa Freightlines keep the old truck or purchase the new one?
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