Bilboa Freightlines, S.A. of Panama has a small truck that ituses for local deliveries. The truck is in bad repair and must beeither overhauled or replaced with a new truck. The company hasassembled the following information (Panama uses the U.S. dollar asits currency):

	Present Truck			New Truck
Purchase costnew	$	41,000		$	55,000
Remaining bookvalue		26,000			-
Overhaul needednow		8,000			-
Annual cashoperating costs		11,000			8,500
Salvage valuenow		14,000			-
Salvage value eightyears from now		1,000			4,000

  

If the company keeps and overhaulsits present delivery truck, then the truck will be usable for eightmore years. If a new truck is purchased, it will be used for eightyears, after which it will be traded in on another truck. The newtruck would be diesel-fuelled, resulting in a substantial reductionin annual operating costs, as shown above.

The company computes depreciationon a straight-line basis. All investment projects are evaluatedusing a 16% discount rate.

    

Click here to view Exhibit 10-1 and Exhibit 10-2, to determinethe appropriate discount factor(s) using tables.

  

Required:

1-a.	Determine the present value of net cash flows using thetotal-cost approach. (Negative amounts should be indicatedwith a minus sign. Round discount factor(s) to 3 decimalplace.)

  
        

  

1-b.	Should Bilboa Freightlines keepthe old truck or purchase the new one?
	Purchase the new truck Keep the old truck

2.	Using the incremental-cost approach, determine the net presentvalue 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.)