Problem 13-28 Net Present Value Analysis [LO13-2]Bilboa Freightlines, S.A., of Panama, has a small...

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Problem 13-28 Net Present Value Analysis [LO13-2]
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
Truck
Purchase cost new $ 36,000 $ 46,000
Remaining book value $ 26,000 -
Overhaul needed now $ 25,000 -
Annual cash operating costs $ 19,000 $ 17,500
Salvage value-now $ 10,000 -
Salvage value-five years from now $ 12,000 $ 11,000

If the company keeps and overhauls its present delivery truck,then the truck will be usable for five more years. If a new truckis purchased, it will be used for five years, after which it willbe traded in on another truck. The new truck would bediesel-operated, resulting in a substantial reduction in annualoperating costs, as shown above.
The company computes depreciation on a straight-line basis. Allinvestment projects are evaluated using a 10% discount rate.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe 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 thenew one?

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Answer

1
	Now	1	2	3	4	5
Keep the old truck:
Overhaul needed now	$-25,000
Annual operating costs		$-19,000	$-19,000	$-19,000	$-19,000	$-19,000
Salvage value (old)						$ 1,000
Total cash flows	$-25,000	$-19,000	$-19,000	$-19,000	$-19,000	$-18,000
Discount factor 10%	1	0.909	0.826	0.7513	0.683	0.621
Present value	$-25,000	$-17,271	$-15,694	$-14,275	$-12,977	$-11,178
Net present value	$-96,395
2
2							Purchase the new truck:
	Now	1	2	3	4	5
Purchase new truck	$-46,000
Salvage value (old)	$ 10,000
Annual operating costs		$-17,500	$-17,500	$-17,500	$-17,500	$-17,500
Salvage value (new)						$ 11,000
Total cash flows	$-36,000	$-17,500	$-17,500	$-17,500	$-17,500	$ 6,500
Discount factor 10%	1	0.909	0.826	0.7513	0.683	0.621
Present value	$-36,000	$-15,908	$-14,455	$-13,148	$-11,953	$ 4,037
Net present value	$-87,426

3
Bilboa Freightlines should purchased the new truck

Answers might vary slightly due to rounding off

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In: AccountingProblem 13-28 Net Present Value Analysis [LO13-2]Bilboa Freightlines, S.A., of Panama, has a small truck...Problem 13-28 Net Present Value Analysis [LO13-2]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:PresentTruckNewTruckPurchase cost new$36,000$46,000Remaining book value$26,000-Overhaul needed now$25,000-Annual cash operating costs$19,000$17,500Salvage value-now$10,000-Salvage value-five years from now$12,000$11,000 If the company keeps and overhauls its present delivery truck,then the truck will be usable for five more years. If a new truckis purchased, it will be used for five years, after which it willbe traded in on another truck. The new truck would bediesel-operated, resulting in a substantial reduction in annualoperating costs, as shown above.The company computes depreciation on a straight-line basis. Allinvestment projects are evaluated using a 10% discount rate.Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determinethe 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 thenew one?

	Present Truck		New Truck
Purchase cost new	$	36,000	$	46,000
Remaining book value	$	26,000		-
Overhaul needed now	$	25,000		-
Annual cash operating costs	$	19,000	$	17,500
Salvage value-now	$	10,000		-
Salvage value-five years from now	$	12,000	$	11,000