Problem 13-28 Net Present Value L013-21 Bilboa Freightlines, S.A, of Panama, has
ID: 2585538 • Letter: P
Question
Problem 13-28 Net Present Value L013-21 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: 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 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 10% discount rate. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables Required: Use the total-cost approach to net present value. (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places.) Salvage valu Should Bilboa Freightlines keep the old truck or purchase the new one?Explanation / Answer
NOW YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 KEEP THE OLD TRUCK Overhaul needed now -25,000 Annual Cash operating cost -19,000 -19,000 -19,000 -19,000 -19,000 Salvage value 12,000 Total cash flows in $ -25,000 -19,000 -19,000 -19,000 -19,000 -7,000 Discount Factor @10% 1.000 0.909 0.826 0.751 0.683 0.621 Present Value in $ -25000.00 -17272.73 -15702.48 -14274.98 -12977.26 -4346.45 Net Present Value -89573.89 PURCHASE THE NEW TRUCK Purchase new truck -46,000 Salvage value(Old) 26,000 Annual Cash Operating cost -17,500 -17,500 -17,500 -17,500 -17,500 Salvage Value(New) 11,000 Total cash flows in $ -20,000 -17,500 -17,500 -17,500 -17,500 -6,500 Discount Factor @10% 1.000 0.909 0.826 0.751 0.683 0.621 Present Value in $ -20000.00 -15909.09 -14462.81 -13148.01 -11952.74 -4035.99 Net Present Value -79508.63 Bilboa Freightliners should purchase the new Truck as Net present value of outflow is $79,508.63 is lesser than keeping the truck of $89,573.89 PURCHASE THE NEW TRUCK