Question

Problem 13-28 Net Present Value Analysis [LO13-2]

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	$	11,000		$	9,000

    

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 13% 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 truc

What is the net present value of the “keep the old truck” alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

	Net present value

What is the net present value of the “purchase the new truck” alternative? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.)

	Net present value

Should Bilboa Freightlines keep the old truck or purchase the new one?

	Purchase the new truckradio button unchecked1 of 2 Keep the old truckradio button unchecked2 of 2

k or purchase the new one?

Answer 1

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	-$24,000
Annual operating costs		-$18,500	-$18,500	-$18,500	-$18,500	-$18,500
Salvage value (Old)						$11,000
Total cash flows	-$24,000	-$18,500	-$18,500	-$18,500	-$18,500	-$7,500
Discount factor 13%	1.000	0.885	0.783	0.693	0.613	0.543
Present Value	-$24,000	-$16,373	-$14,486	-$12,821	-$11,341	-$4,073
Net Present Value	-$83,092
Purchase the New Truck:
Purchase new truck	-$50,000
Salvage value (old)	$15,000
Annual operating costs		-$18,000	-$18,000	-$18,000	-$18,000	-$18,000
Salvage value (new)						$9,000
Total cash flows	-$35,000	-$18,000	-$18,000	-$18,000	-$18,000	-$9,000
Discount factor 13%	1.000	0.885	0.783	0.693	0.613	0.543
Present Value	-$35,000	-$15,930	-$14,094	-$12,474	-$11,034	-$4,887
Net Present Value	-$93,419

Solution 3:

Yes, Bilboa Freightlines keep the old truck.