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):

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.

Required:

1. Should Bilboa Freightlines keep the old truck or purchase the new one? Use the total cost approach to net present value in making your decision. Round to the nearest whole dollar.

2. Redo part (1), this time using the incremental cost approach.

Transcribed Image Text:

Present Truck New Truck Purchase cost new $41,000 $55,000 4 Remaining book value 26,000 5 Overhaul needed now 8,000 6 Annual cash operating costs 11,000 8,500 7 Salvage value now 14,000 8 Salvage value eight years from now 1,000 4,000