Question

Bilboa Freightlines, S.A. of Panama has a small truck that it uses for local deliveries. The truck is in bad repair and must be either overhauled or replaced with a new truck. The company has assembled the following information (Panama uses the U.S. dollar as its currency):

	Present Truck			New Truck
Purchase cost new	$	41,000		$	55,000
Remaining book value		26,000			-
Overhaul needed now		8,000			-
Annual cash operating costs		11,000			8,500
Salvage value now		14,000			-
Salvage value eight years from now		1,000			4,000

  

If the company keeps and overhauls its present delivery truck, then the truck will be usable for eight more years. If a new truck is purchased, it will be used for eight years, after which it will be traded in on another truck. The new truck would be diesel-fuelled, 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 16% discount rate.

    

Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.

  

Required:

1-a.	Determine the present value of net cash flows using the total-cost approach. (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3 decimal place.)

  
        

  

1-b.	Should Bilboa Freightlines keep the old truck or purchase the new one?
	Purchase the new truck Keep the old truck

2.	Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the new truck? (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3 decimal place.)

    
        

Answer 1

PVAF(r,n) = {1 - (1 + r)^(-n)} / r