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	$	49,000		$	68,500
Remaining book value		34,000			-
Overhaul needed now		14,500			-
Annual cash operating costs		20,500			14,500
Salvage value now		19,500			-
Salvage value eight years from now		5,000			8,000

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?

multiple choice

• 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.)

    

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Answer 1

Computation of Net Present Value - Keep the Old Truck- Bilboa Freighlines
Particulars	Now	1	2	3	4	5	6	7	8
Overhaul Needed Now	-$14,500.00
Annual Cash Operating Costs		-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00
Salvage Value of old Truck eight year from Now									$5,000.00
Tototal Cash Flows	-$14,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$20,500.00	-$15,500.00
PVF@16%	1.0000	0.8621	0.7432	0.6407	0.5523	0.4761	0.4104	0.3538	0.3050
Present Value	-$14,500.00	-$17,672.41	-$15,234.84	-$13,133.48	-$11,321.97	-$9,760.32	-$8,414.07	-$7,253.51	-$4,727.89
Net Present Value	-$102,018.49
Computation of Net Present Value - Purchase of New Truck -Bilboa Freighlines
Particulars	Now	1	2	3	4	5	6	7	8
Purchase New Truck	-$68,500.00
Salvage Value of old Truck Now	$19,500.00
Annual Operating Costs		-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00
Salvage Value of New Truck									$8,000.00
Tototal Cash Flows	-$49,000.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$14,500.00	-$6,500.00
PVF@16%	1.0000	0.8621	0.7432	0.6407	0.5523	0.4761	0.4104	0.3538	0.3050
Present Value	-$49,000.00	-$12,500.00	-$10,775.86	-$9,289.54	-$8,008.22	-$6,903.64	-$5,951.41	-$5,130.53	-$1,982.67
Net Present Value	-$109,541.86

Keept he Old truck

Computation of Incrementotal NPV
Purchase New Truck	-$109,541.86
Keep Old Truck	-$102,018.49
Incrementotal NPV of Purchase of New Truck	-$7,523.38