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 i Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $36,000 $ 23,000 $ 22,000 $ 17,500 $ 12,000 $ 15,000 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. New Truck $ 48,000 The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 9% discount rate. Click here to view Exhibit 78-1 and Exhibit 78-2, to determine the appropriate discount factor(s) using tables. Complete this question by entering your answers in the tabs below. Required 1 $ 16,000 $ 6,000 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? Required 2 Required 3
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 i Annual cash operating costs Salvage value-now Salvage value-five years from now Present Truck $36,000 $ 23,000 $ 22,000 $ 17,500 $ 12,000 $ 15,000 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. New Truck $ 48,000 The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 9% discount rate. Click here to view Exhibit 78-1 and Exhibit 78-2, to determine the appropriate discount factor(s) using tables. Complete this question by entering your answers in the tabs below. Required 1 $ 16,000 $ 6,000 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? Required 2 Required 3
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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D2.
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 i
Annual cash operating costs
Salvage value-now
Salvage value-five years from now
Present
Truck
$36,000
$ 23,000
$ 22,000
$ 17,500
$ 12,000
$ 15,000
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.
New
Truck
$ 48,000
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 9% discount rate.
Click here to view Exhibit 78-1 and Exhibit 78-2, to determine the appropriate discount factor(s) using tables.
$ 16,000
$ 6,000
Required:
1. What is the net present value of the "keep the old truck" alternative?
Complete this question by entering your answers in the tabs below.
Required 1
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?
Required 2 Required 3
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