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: Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck New Truck $ 33,000 $ 40,000 $ 24,000 $ 23,000 $ 22,000 $ 20,500 $ 7,000 $ 25,000 $ 14,000 If the company 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 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 8% discount rate. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the 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 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: Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck New Truck $ 33,000 $ 40,000 $ 24,000 $ 23,000 $ 22,000 $ 20,500 $ 7,000 $ 25,000 $ 14,000 If the company 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 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 8% discount rate. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the 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 the new one?
Chapter11: Long-term Assets
Section: Chapter Questions
Problem 8PB: Montello Inc. purchases a delivery truck for $25,000. The truck has a salvage value of $6,000 and is...
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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:
Purchase cost new
Remaining book value
Overhaul needed now
Annual cash operating costs
Salvage value-now
Salvage value-five years from now
Present
Truck
New Truck
$ 33,000
$ 40,000
$ 24,000
$ 23,000
$ 22,000
$ 20,500
$ 7,000
$ 25,000
$ 14,000
If the company 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 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 8% discount rate.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the 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 the new one?
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