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 | $ | 34,000 | | $ | 44,000 | |
| Remaining book value | $ | 21,000 | | | - | |
| Overhaul needed now | $ | 20,000 | | | - | |
| Annual cash operating costs | $ | 16,500 | | $ | 15,000 | |
| Salvage value-now | $ | 10,000 | | | - | |
| Salvage value-five years fromnow | $ | 9,000 | | $ | 9,000 | |
|
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 6% 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?
