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): Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value now Salvage value eight years from now Present Truck New Truck $37,000 $50,500 22,000 Purchase the new truck Keep the old truck 8,500 13,000 13,500 2,600 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. 8,500 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. Purchase the new truck Keep the old truck 5,600 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 1-b. Should Bilboa Freightlines keep the old truck or purchase the new one? 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
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): Purchase cost new Remaining book value Overhaul needed now Annual cash operating costs Salvage value now Salvage value eight years from now Present Truck New Truck $37,000 $50,500 22,000 Purchase the new truck Keep the old truck 8,500 13,000 13,500 2,600 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. 8,500 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. Purchase the new truck Keep the old truck 5,600 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 1-b. Should Bilboa Freightlines keep the old truck or purchase the new one? 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
Chapter11: Managing Transaction Exposure
Section: Chapter Questions
Problem 47QA
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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):
Purchase cost new
Remaining book value
Overhaul needed now
Annual cash operating costs
Salvage value now
Salvage value eight years
from now
Present
Truck
$37,000 $50,500
New
Truck
22,000
Purchase the new truck
Keep the old truck
8,500
13,000 8,500
13,500
2,600
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.. investment projects are evaluated using a 16%
discount rate.
Click here ew Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using
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.)
5,600
Present Value
of Net Cash
Flows
Purchase the new truck
O Keep the old truck
1-b. Should Bilboa Freightlines keep the old truck or purchase the new one?
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
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