Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intraci
ID: 2805148 • 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:
Present Truck
New
Truck
Purchase cost new
$
27,000
$
36,000
Remaining book value
$
14,000
-
Overhaul needed now
$
13,000
-
Annual cash operating costs
$
14,000
$
11,500
Salvage value-now
$
9,000
-
Salvage value-five years from now
$
5,000
$
8,000
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 13% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1-a.
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.)
Now
1
2
3
4
5
Keep the old truck:
Overhaul needed now
Annual operating costs
Salvage value (old)
Total cash flows
Discount factor 13%
Present value
Net present value
Purchase the new truck:
Purchase new truck
Salvage value (old)
Annual operating costs
Salvage value (new)
Total cash flows
Discount factor 13%
Present value
Net present value
Present Truck
New
Truck
Purchase cost new
$
27,000
$
36,000
Remaining book value
$
14,000
-
Overhaul needed now
$
13,000
-
Annual cash operating costs
$
14,000
$
11,500
Salvage value-now
$
9,000
-
Salvage value-five years from now
$
5,000
$
8,000
Explanation / Answer
Calculation of NPV Now 1 2 3 4 5 Keep the old truck: Overhaul needed now -$13,000 Annual operating costs -$14,000 -$14,000 -$14,000 -$14,000 -$14,000 Salvage value (old) $5,000 Total cash flows -$13,000 -$14,000 -$14,000 -$14,000 -$14,000 -$9,000 Discount factor 13% 1 0.88496 0.78315 0.69305 0.61332 0.54276 Present value -$13,000 -$12,389 -$10,964 -$9,703 -$8,586 -$4,885 Net present value -$59,527 Purchase the new truck: Purchase new truck -$27,000 Salvage value (old) $9,000 Annual operating costs -$11,500 -$11,500 -$11,500 -$11,500 -$11,500 Salvage value (new) $8,000 Total cash flows -$18,000 -$11,500 -$11,500 -$11,500 -$11,500 -$3,500 Discount factor 13% 1 0.88496 0.78315 0.69305 0.61332 0.54276 Present value -$18,000 -$10,177 -$9,006 -$7,970 -$7,053 -$1,900 Net present value -$54,106
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