Question

Maxilift Australia 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 21,000 30,000 Remaining book value 11,500 Overhaul needed now 7,000 Annual cash operating costs 10,000 6,500 Salvage value now 9,000 Salvage value eight years from now 1,000 4,000 Additional Information • If the company keeps and overhauls the 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. • 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 16% discount rate. Required: (a) Determine the present value of the net cash flows associated with the purchase of the new truck option. (b) Determine the present value of the net cash flows associated with the keep the old truck option. (c) Which option would you recommend that the company accept? Why? (

Answer 1