Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information: Present Truck New Truck Purchase cost new $ 21,000 $ 30,000 Remaining book value $ 11,500 0 Overhaul needed now $ 7,000 0 Annual cash operating costs $ 10,000 $ 6,500 Salvage value- now $ 9,000 0 Salvage value-five years from now $ 1,000 $ 4,000 If Bright (USA) keeps and overhauls its present delivery truck, then the truck will be usable for five more years. 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 truck would be dieseloperated, resulting in a substantial reduction in annual operating costs, as shown above. Bright (USA) computes depreciation on a straight-line basis. All investment projects are evaluated using a 16% discount rate. 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 the new one?
Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn out and must be either overhauled or replaced with a new truck. The company has assembled the following information: Present Truck New Truck Purchase cost new $ 21,000 $ 30,000 Remaining book value $ 11,500 0 Overhaul needed now $ 7,000 0 Annual cash operating costs $ 10,000 $ 6,500 Salvage value- now $ 9,000 0 Salvage value-five years from now $ 1,000 $ 4,000 If Bright (USA) keeps and overhauls its present delivery truck, then the truck will be usable for five more years. 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 truck would be dieseloperated, resulting in a substantial reduction in annual operating costs, as shown above. Bright (USA) computes depreciation on a straight-line basis. All investment projects are evaluated using a 16% discount rate. 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 the new one?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Bilboa Freightlines, S.A., of Panama, has a small truck that it uses for intracity deliveries. The truck is worn
out and must be either overhauled or replaced with a new truck. The company has assembled the following
information: Present Truck New Truck Purchase cost new $ 21,000 $ 30,000 Remaining book value $
11,500 0 Overhaul needed now $7,000 0 Annual cash operating costs $ 10,000 $ 6,500 Salvage value -
now $ 9,000 0 Salvage value - five years from now $ 1,000 $ 4,000 If Bright (USA) keeps and overhauls its
present delivery truck, then the truck will be usable for five more years. 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 truck would be dieseloperated,
resulting in a substantial reduction in annual operating costs, as shown above. Bright (USA) computes
depreciation on a straight-line basis. All investment projects are evaluated using a 16% discount rate.
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 the new one?
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