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 $ 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 $ 7,000 $ 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 11% 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

Keep the old truck
Now 1 2 3 4 5
Overhaul -17000
Annual operating cost -16000 -16000 -16000 -16000 -16000
Salvage value (old) 7000
Total cash outflows T -17000 -16000 -16000 -16000 -16000 -9000
Discount factor D 1 0.901 0.812 0.731 0.659 0.593
Present value T*D -17000 -14416 -12992 -11696 -10544 -5337
NPV total of present value -71985
Purcahse of new truck
Purchase price -39000
Salvage value (old) 8000
Annual operating cost -13500 -13500 -13500 -13500 -13500
Salvage value (new) 8000
Total cash outflows T -31000 -13500 -13500 -13500 -13500 -5500
Discount factor D 1 0.901 0.812 0.731 0.659 0.593
Present value T*D -31000 -12164.0 -10962.0 -9869.0 -8897.0 -3262.0
NPV total of present value -76154
Ans 1 NPV of old truck ($71,985)
ans 2 NPV of new ($76,154)
ans 3 should keep truck as negative NPV is less in keeping the truch than purchasing it
If any doubt please comment. If satisfied you can rate the answer

ekkarill92 answered 1 year ago
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