6. 10 points S A, of Paname, hasa smail truck that it uses for intrecty deliveri

Question

6. 10 points S A, of Paname, hasa smail truck that it uses for intrecty deliveries. The wuck is wor out and must be ether overhauled or repliaced with a new truck The compary has assemibled tve folowing Purchase cost new Remaining book value Overhaul needed now Annual cash operating cos Present New 23,000 $28,000 $ 9,000 $11 500 8,000 500 S 8.000 3 5.,000 Salvage value-five years from now 4,000 4,000 If the company keeps and overhauls its present delivery truck then the years. If a new truck is purchased, i truck. The new truck would be diesel-operated, resulting i costs, as shown above truck will be usable for five more t will be used for five years, after which it will be traded in on another n a substantial reduction in annual operating The company computes depreciation on a straight-line basis. All investment projects are evaluated using a9%discount rate. Click here to view Exhibit 138-1 and Exhibit 138-2, to determine the tables. appropriate discount factorts) using t Required 1-a Use the total-cost approach o net present value. (Any cash outflows should be indicated by a minus sign. Round discount factorts) to 3 decimal places.) Now Keep the old truck Overhaul needed now Annual operating costs Salvage value (old) Total cash flows Discount factor 9% Present value Net present value o s 0 S o S 0 S 0 $ o S Purchase the new truck Purchase new truck Salvage value (old) Annual operating costs Salvage value (new) Total cash fows Discount factor 9% Present value Net present value o S o S o S o S 0 S 0 S o S o $ 1-b. Should Biboa Freightlines keep the old truck or purchase the new one?

Explanation / Answer

1-a Keep Old Truck Now 1 2 3 4 5 Overhaul needed now 9000 Annual Operating Cost 11500 11500 11500 11500 11500 Salvage value old 4000 Total Cash Flow 9000 11500 11500 11500 11500 7500 Discount Factor 9% 1 0.91743 0.84168 0.77218 0.70843 0.64993 Present value     9,000    10,550    9,679      8,880       8,147        4,874 Net Present Value 51,131 Purchase the new Truck Purchase new Truck 25000 Salvage value old 5000 Annual Operating Cost 5000 5000 5000 5000 5000 Salvage value new 4000 Total Cash Flow 20000 5000 5000 5000 5000 1000 Discount Factor 9% 1 0.91743 0.84168 0.77218 0.70843 0.64993 Present value 20,000      4,587    4,208      3,861       3,542           650 Net Present Value 36,849 1-b Company should purchase new truck because it's net present cash flow is lower

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