Question
In: Accounting
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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 | $ | 38,000 | $ | 48,000 | ||
| Remaining book value | $ | 28,000 | - | |||
| Overhaul needed now | $ | 27,000 | - | |||
| Annual cash operating costs | $ | 20,000 | $ | 18,500 | ||
| Salvage value-now | $ | 10,000 | - | |||
| Salvage value-five years from now | $ | 14,000 | $ | 12,000 | ||
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 7% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1. What is the net present value of the “keep the old truck” alternative?
2. What is the net present value of the “purchase the new truck” alternative?
3. Should Bilboa Freightlines keep the old truck or purchase the new one?
Solutions
Expert Solution
Solution 1 & 2:
| Total cost approach to Net Present Value - Bilboa Freighlines | ||||||
| Particulars | Now | 1 | 2 | 3 | 4 | 5 |
| Keep the old truck: | ||||||
| Overhaul needed now | -$27,000.00 | |||||
| Annual operating costs | -$20,000.00 | -$20,000.00 | -$20,000.00 | -$20,000.00 | -$20,000.00 | |
| Salvage value (Old) | $14,000.00 | |||||
| Total cash flows | -$27,000.00 | -$20,000.00 | -$20,000.00 | -$20,000.00 | -$20,000.00 | -$6,000.00 |
| Discount factor 7% | 1.000 | 0.935 | 0.873 | 0.816 | 0.763 | 0.713 |
| Present Value | -$27,000.00 | -$18,700.00 | -$17,460.00 | -$16,320.00 | -$15,260.00 | -$4,278.00 |
| Net Present Value | -$99,018.00 | |||||
| Purchase the New Truck: | ||||||
| Purchase new truck | -$48,000.00 | |||||
| Salvage value (old) | $10,000.00 | |||||
| Annual operating costs | -$18,500.00 | -$18,500.00 | -$18,500.00 | -$18,500.00 | -$18,500.00 | |
| Salvage value (new) | $12,000.00 | |||||
| Total cash flows | -$38,000.00 | -$18,500.00 | -$18,500.00 | -$18,500.00 | -$18,500.00 | -$6,500.00 |
| Discount factor 7% | 1.000 | 0.935 | 0.873 | 0.816 | 0.763 | 0.713 |
| Present Value | -$38,000.00 | -$17,297.50 | -$16,150.50 | -$15,096.00 | -$14,115.50 | -$4,634.50 |
| Net Present Value | -$105,294.00 | |||||
Solution 3:
As NPV of keeping old truck is higher than NPV of "Purchase the new truck" alternative. Therefore Bilboa Freightlines should keep the old truck.
ekkarill92 answered 1 year agoRelated Solutions
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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) $ 28,000 $ 38,000 Remaining book value $ 15,000
Overhaul needed now $ 14,000 Annual cash operating costs $ 14,500 $
13,000 Salvage value-now $ 10,000 Salvage value-five years from now
$ 9,000 $ 12,000...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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
$
35,000
$
50,000
Remaining book value
$
25,000
-
Overhaul needed now
$
24,000
-
Annual cash operating costs
$
18,500
$
18,000
Salvage value-now
$
15,000
-
Salvage value-five years from now
$...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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)
$
36,000
$
48,000
Remaining book value
$
23,000
Overhaul needed now
$
22,000
Annual cash operating costs
$
17,500
$
16,000
Salvage value-now
$
12,000
Salvage value-five years from now
$
15,000
$
6,000...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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)
$
25,000
$
30,000
Remaining book value
$
11,000
Overhaul needed now
$
11,000
Annual cash operating costs
$
12,500
$
10,000
Salvage value-now
$
5,000
Salvage value-five years from now
$
4,000
$
5,000...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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
$
36,000
$
48,000
Remaining book value
$
23,000
-
Overhaul needed now
$
22,000
-
Annual cash operating costs
$
17,500
$
16,000
Salvage value-now
$
12,000
-
Salvage value-five years from now
$...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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
$
36,000
$
48,000
Remaining book
value
$
23,000
-
Overhaul needed
now
$
22,000
-
Annual cash
operating costs
$
17,500
$
16,000
Salvage
value-now
$
12,000
-
Salvage
value-five years from now
$...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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
$
26,000
$
34,000
Remaining book value
$
13,000
-
Overhaul needed now
$
12,000
-
Annual cash operating costs
$
13,500
$
11,000
Salvage value-now
$
8,000
-
Salvage value-five years from now
$...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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
$
33,000
$
42,000
Remaining book value
$
20,000
-
Overhaul needed now
$
19,000
-
Annual cash operating costs
$
16,000
$
14,500
Salvage value-now
$
9,000
-
Salvage value-five years from now
$...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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
$
33,000
$
40,000
Remaining book
value
$
24,000
-
Overhaul needed
now
$
23,000
-
Annual cash
operating costs
$
22,000
$
20,500
Salvage
value-now
$
7,000
-
Salvage value-five
years from now
$...
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The...
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
$
31,000
$
39,000
Remaining book value
$
18,000
-
Overhaul needed now
$
17,000
-
Annual cash operating costs
$
16,000
$
13,500
Salvage value-now
$
8,000
-
Salvage value-five years from
now
$...
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