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
- Overhaul needed now $7,000
- Annual cash operating costs $10,000 $6,500
- Salvage value-now $9,000
- Salvage value-eight years from now $1,000 $4,000
If the company keeps and overhauls its present delivery truck, then the truck will be usable for eight more years. If a new truck is purchased, it will be used for eight 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 16% discount rate.To determine the appropriate discount factor(s) using tables, click here to view Exhibit 12B-1 and Exhibit 12B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.
Requirement 1:
(a)Determine the net present value using the total-cost approach.