Assignment Print View 2021-04-08, 1:39 PM
Score: 50/50 Points 100 %
1. Award: 10 out of 10.00 points
Bilboa Freightlines, S.A. of Panama has a small truck that it uses for local deliveries. The truck is in bad repair
and must be either overhauled or replaced with a new truck. The company has assembled the following
information (Panama uses the U.S. dollar as its currency):
Present New
Truck Truck
Purchase cost new $ 37,000 $ 50,500
Remaining book value 22,000 -
Overhaul needed now 8,500 -
Annual cash operating costs 13,000 8,500
Salvage value now 13,500 -
Salvage value eight years from now 2,600 5,600
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-fuelled, 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.
Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.
Required:
1-a. Determine the present value of net cash flows using the total-cost approach. (Negative amounts should
be indicated with a minus sign. Round discount factor(s) to 3 decimal place.)
Present Value of
Net Cash Flows
Purchase the new truck $ (72,216) !
Keep the old truck $ (64,179) !
1-b. Should Bilboa Freightlines keep the old truck or purchase the new one?
Keep the old truck
https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&sin…822384&wid=13252715543023804&role=student&sid=13252716478019761 Page 1 of 4
Assignment Print View 2021-04-08, 1:39 PM
2. Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the
new truck? (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3
decimal place.)
Net present value $ (8,037) !
References
Worksheet Learning Objective: 10-
02 Understand and
apply alternative
methods to analyze
capital investments.
Bilboa Freightlines, S.A. of Panama has a small truck that it uses for local deliveries. The truck is in bad repair
and must be either overhauled or replaced with a new truck. The company has assembled the following
information (Panama uses the U.S. dollar as its currency):
Present New
Truck Truck
Purchase cost new $ 37,000 $ 50,500
Remaining book value 22,000 -
Overhaul needed now 8,500 -
Annual cash operating costs 13,000 8,500
Salvage value now 13,500 -
Salvage value eight years from now 2,600 5,600
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-fuelled, 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.
Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.
Required:
1-a. Determine the present value of net cash flows using the total-cost approach. (Negative amounts should
be indicated with a minus sign. Round discount factor(s) to 3 decimal place.)
https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&sin…822384&wid=13252715543023804&role=student&sid=13252716478019761 Page 2 of 4
Assignment Print View 2021-04-08, 1:39 PM
Present Value of Net
Cash Flows
Purchase the new truck $ (72,216)
Keep the old truck $ (64,179)
1-b. Should Bilboa Freightlines keep the old truck or purchase the new one?
Keep the old truck
2. Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the
new truck? (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3
decimal place.)
Net present value $ (8,037)
Explanation:
1-a.
The total-cost approach:
Present
Amount of 16% Value of
Item Year(s) Cash Flows Factor Cash Flows
Purchase the new truck:
Initial investment—new truck Now $ (50,500) 1.000 $ (50,500)
Salvage of the old truck Now 13,500 1.000 13,500
Annual cash operating costs 1-8 (8,500) 4.344 (36,924)
Salvage of the new truck 8 5,600 0.305 1,708
Present value of the net $ (72,216)
cash outflows
Keep the old truck:
Overhaul needed now Now $ (8,500) 1.000 $ (8,500)
Annual cash operating costs 1-8 (13,000) 4.344 (56,472)
Salvage of the old truck 8 2,600 0.305 793
Present value of the net
$ (64,179)
cash outflows
Net present value in favour of $ 8,037
keeping the old truck
1-b.
The company should keep the old truck, since it has the lowest present value of total cost.
2.
The incremental-cost approach:
Present
Amount of 16% Value of
Item Year(s) Cash Flows Factor Cash Flows
https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&sin…822384&wid=13252715543023804&role=student&sid=13252716478019761 Page 3 of 4
Assignment Print View 2021-04-08, 1:39 PM
Incremental investment—new truck Now $ (42,000)* 1.000 $ (42,000)
Salvage of the old truck Now 13,500 1.000 13,500
Savings in annual cash operating costs 1-8 4,500 4.344 19,548
Difference in salvage value in 8 years 8 3,000 0.305 915
Net present value in favour of $ (8,037)
purchasing the new truck
*$50,500 – $8,500 = $42,000. The $13,500 salvage value now of the old truck could also be deducted, leaving
an incremental investment for the new truck of only $28,500.
https://ezto.mheducation.com/hm.tpx?todo=c15SinglePrintView&sin…822384&wid=13252715543023804&role=student&sid=13252716478019761 Page 4 of 4
