Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intraci
ID: 2533396 • Letter: B
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 8% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
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.)
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:
Explanation / Answer
Answer a
Calculation of net present value for Present Truck
Answer b
Calculation of net present value for New Truck
Conclusion : Since npv under total cost approach for present truck is less than that of new truck , it is advisable to keep the present truck & incure the overhaul expense needed
Particulars Year Cash flows ($) PV factor @ 8% Discounted Cash flows ($) Overhaul needed now 0 or base year (23,000) 1 (23,000) Annual cash operating costs 1- 5 years (22,000) 3.993 (87,846) Salvage value or Terminal value 5 th year 25,000 0.681 17,025 Net present value ($93,821)Related Questions
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