Bilboa freightlines sa of panama has a small truck that it

Reference no: EM13600093

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.

Reference no: EM13600093

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