Lulu Hypermarket has a pickup truck that it uses to deliver the online orders to...
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Lulu Hypermarket has a pickup truck that it uses to deliver the online orders to their customers. The truck must be either overhauled or replaced with a new truck. The company has assembled the following information: Purchase cost (new) Remaining book value. Overhaul needed now Annual cash operating costs Salvage value (now) Salvage value (six years from now) old Truck New Truck $38,000 $51,000 $26,000 $25.000 $20,000 $18,500 $15,000 $12,000 $10,000 If the company keeps and overhauls its old delivery truck currently in use, then the truck will be usable for six more years. If a new truck is purchased, it will be used for six years, after which it will be traded in with 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 11% discount rate. Use the following tables to determine the appropriate discount factor(s). 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 Lulu Hypermarket keep the old truck or purchase the new one? Why
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