Bilboa Freightlines, S A., of Panama, has a small truck that it uses for intraci

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 or replaced with a new truck. The company has assembled the following information: 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 9 degree discount rate. 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.)

Explanation / Answer

Now 1 2 3 4 5 Keep the old truck Overhaul needed now 9,000 Annual operating costs 11,500 11,500 11,500 11,500 11,500 Salvage value (old) (4,000) Total cash flows 9,000 11,500 11,500 11,500 11,500 7,500 Discount factor at 9% 1.000 0.9174 0.8417 0.7722 0.7084 0.6499 Present value 9,000 10,550 9,680 8,880 8,147 4,874 Net present value 51,131 Purchase new truck Purchase cost 28,000 Salvage value (old) (5,000) Annual operating costs 8,000 8,000 8,000 8,000 8,000 Salvage value ( new) (4,000) Total cash flows 23,000 8,000 8,000 8,000 8,000 4,000 Discount factor at 9% 1.000 0.9174 0.8417 0.7722 0.7084 0.6499 Present values 23,000 7,339 6,734 6,178 5,667 2,600 Net present value 51,518

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