Bilboa Freightlines, S.A., of Panama, has a small truck that ituses for intracity deliveries. The truck is worn out and must beeither overhauled or replaced with a new truck. The company hasassembled the following information: Present Truck New TruckPurchase cost new $ 23,000 $ 28,000 Remaining book value $ 10,000 -Overhaul needed now $ 9,000 - Annual cash operating costs $ 11,500$ 8,000 Salvage value-now $ 5,000 - Salvage value-five years fromnow $ 4,000 $ 4,000 If the company keeps and overhauls its presentdelivery truck, then the truck will be usable for five more years.If a new truck is purchased, it will be used for five years, afterwhich it will be traded in on another truck. The new truck would bediesel-operated, resulting in a substantial reduction in annualoperating costs, as shown above. The company computes depreciationon a straight-line basis. All investment projects are evaluatedusing a 9% discount rate. Click here to view Exhibit 13B-1 andExhibit 13B-2, to determine the appropriate discount factor(s)using tables. Required: 1. What is the net present value of theākeep the old truckā alternative? 2. What is the net present valueof the āpurchase the new truckā alternative? 3. Should BilboaFreightlines keep the old truck or purchase the new one?
