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:

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 10% 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?

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:

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 6% 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?

Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $487,000 cost with an expected four-year life and a $23,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

1. Compute straight-line depreciation for each year of this new machine’s life.
2. Determine expected net income and net cash flow for each year of this machine’s life.
3. Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year.
4. Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year.
5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.

Please give explinations and formulas!

A small solid sphere of mass M₀, of radius R₀, and of uniform density ?₀ is placed in a large bowl containing water. It floats and the level of the water in the dish is L. Given the information below, determine the possible effects on the water level L, (R-Rises, F-Falls, U-Unchanged), when that sphere is replaced by a new solid sphere of uniform density.
Read it to me

R F U R or U F or U R or F or U  The new sphere has radius R = R₀ and density ? < ?₀
R F U R or U F or U R or F or U  The new sphere has density ? = ?₀ and mass M < M₀
R F U R or U F or U R or F or U  The new sphere has density ? > ?₀ and mass M = M₀
R F U R or U F or U R or F or U  The new sphere has radius R > R₀ and density ? < ?₀
R F U R or U F or U R or F or U  The new sphere has mass M > M₀ and density ? = ?₀
R F U R or U F or U R or F or U  The new sphere has density ? < ?₀ and mass M = M₀

Factor Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $507,000 cost with an expected four-year life and a $19,000 salvage value. All sales are for cash, and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)

Required:
1. Compute straight-line depreciation for each year of this new machine’s life.
2. Determine expected net income and net cash flow for each year of this machine’s life.
3. Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year.
4. Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year.
5. Compute the net present value for this machine using a discount rate of 6% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.)

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 $ 23,000 $ 28,000 Remaining book value $ 10,000 - Overhaul needed now $ 9,000 - Annual cash operating costs $ 11,500 $ 8,000 Salvage value-now $ 5,000 - Salvage value-five years from now $ 4,000 $ 4,000 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 9% 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?

Two years ago, you purchase a house of $100,000. You borrow a mortgage with 80% of LTV (loan to value ratio). The annual interest rate on the mortgage is 6%. Payments are being made monthly, and the loan tem is 30 years. You have found another lender who will refinance only the current outstanding loan balance at 4.5% with monthly payments for 30 years. The new lender will charge three discount points and the refinancing cost is equal to $3,000. Note that the points and refinancing cost will be from your own pocket

What is your monthly payment for the current loan?

$429.64

$479.64

$529.55

$599.55

What is the new loan amount if you choose to refinance?

$70,974.59

$77,974.59

$87,468.24

$97,468.24

What is your monthly payment for the new loan?

$368.57

$408.57

$425.09

$395.09

What is annual effective cost of the new loan if holding the loan for 30 years?

4.882%

5.116%

6.016%

6.116%

Should you refinance today if you hold the loan for 30 years?

Yes

No

The effective costs for the two loans are the same, so either way is OK

Not enough information

If the new lender will allow you to refinance the current outstanding loan balance plus all the costs associated with the new loan, what is your new loan amount if you choose to refinance?

$73,103.83

$83,313.83

$90,523.96

$83,478.96

1. A company is currently located in Rafah and employs 50 people. Due to strong growth the company needs additional office space. The company has the option of renting additional space at its current location in Rafah for the next two years, but after that will need to move to a new building. Another option the company is considering moving the entire operation to Jabalia immediately. A third option is for the company to rent a new building in Rafah immediately. If the company chooses the first option and rent new space at its current location, it can, at the end of two years, either rent a new building in Rafah or move to Jabalia.

          The following are some additional facts about the alternatives and current situation:

• The company has a 75 percent chance of surviving the next two years.
• Renting the new space for two years at the current location in Rafah would cost $750,000 per year.
• Moving the entire operation to a Jabalia would cost $1 million. Renting space would cost $500,000 per year.
• Moving to a new building in Rafah would cost $200,000, and renting the new building’s space would cost $650,000 per year.
• The company can cancel the rent at any time.
• The company will build its own building in five years, if it survives.
• Assume all other costs and revenues are the same no matter where the company is located.

WHAT COULD THE COMPANY DO?

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 $ 36,000 Remaining book value $ 24,000 - Overhaul needed now $ 23,000 - Annual cash operating costs $ 22,000 $ 19,500 Salvage value-now $ 5,000 - Salvage value-five years from now $ 20,000 $ 12,000 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 7% 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?

A small solid sphere of mass M₀, of radius R₀, and of uniform density ρ₀ is placed in a large bowl containing water. It floats and the level of the water in the dish is L. Given the information below, determine the possible effects on the water level L, (R-Rises, F-Falls, U-Unchanged), when that sphere is replaced by a new solid sphere of uniform density.

R F U R or U F or U R or F or U  The new sphere has radius R < R₀ and mass M = M₀

R F U R or U F or U R or F or U  The new sphere has mass M = M₀ and density ρ < ρ₀

R F U R or U F or U R or F or U  The new sphere has radius R = R₀ and mass M > M₀

R F U R or U F or U R or F or U  The new sphere has density ρ = ρ₀ and radius R < R₀

R F U R or U F or U R or F or U  The new sphere has density ρ < ρ₀ and radius R > R₀

R F U R or U F or U R or F or U  The new sphere has density ρ = ρ₀ and radius R > R₀