Bilboa Freightliners, S . A . , of Panama, has a small truck that it uses for
Question:
Bilboa Freightliners, SA 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 $ $
Remaining book value $
Overhaul needed now $
Annual cash operating costs $ $
Salvage valuenow $
Salvage valuefive years from now $ $
If Bright USA 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 dieseloperated, resulting in a substantial reduction in annual operating costs, as shown
above.
Bright USA computes depreciation on a straightline basis. All investment projects
are evaluated using a discount rate.
Required:
What is the net present value of the keep the old truck alternative?
What is the net present value of the purchase the new truck alternative?
Should Bilboa Freightlines keep the old truck or purchase the new one?