Bilboa Freightlines, S.A., of Panama, has a small truck that ituses for intracity deliveries. The truck is worn out and must beeither overhauled or replaced with a new truck. The company hasassembled the following information: Present Truck New TruckPurchase 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 fromnow $ 20,000 $ 12,000 If the company keeps and overhauls itspresent delivery truck, then the truck will be usable for five moreyears. 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 truckwould be diesel-operated, resulting in a substantial reduction inannual operating costs, as shown above. The company computesdepreciation on a straight-line basis. All investment projects areevaluated using a 7% discount rate. Click here to view Exhibit13B-1 and Exhibit 13B-2, to determine the appropriate discountfactor(s) using tables. Required: 1. What is the net present valueof the “keep the old truck” alternative? 2. What is the net presentvalue of the “purchase the new truck” alternative? 3. Should BilboaFreightlines keep the old truck or purchase the new one?
