Principles of Accounting Volume 1
Principles of Accounting Volume 1
19th Edition
ISBN: 9781947172685
Author: OpenStax
Publisher: OpenStax College
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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 $ 23,000   $ 29,000  
Remaining book value $ 11,000     -  
Overhaul needed now $ 10,000     -  
Annual cash operating costs $ 12,000   $ 8,500  
Salvage value-now $ 6,000     -  
Salvage value-five years from now $ 5,000   $ 5,000  
 

    

If the company 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 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 12% discount rate.


Required:

1. What is the net present value of the “keep the old truck” alternative?

2. What is the net present value of the “purchase the new truck” alternative?

3. Should Bilboa Freightlines keep the old truck or purchase the new one?

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