1002. 1Bilboa Freightlines, S.A. of Panama has a small truck that tuses for local deliveries. The truck is in bad repair and mustbe either overhauled or replaced with a new truck. The company has assembled the following information (Panamauses the U.S. dollar as its currency):ntsJBookPrint0erencesPurchase cost newRemaining book value.Overhaul needed nowAnnual cash operating costsSalvage value nowSalvage value eight yearsfrom nowIf the company keeps and overhauls its present delivery truck, then the truck will be usable for eight more years. If anew truck is purchased, it will be used for eight years, after which it will be traded in on another truck. The new truckwould be diesel-fuelled, resulting in a substantial reduction in annual operating costs, as shown above.Purchase the new truckKeep the old truckPresentTruckNewTruck$37,000 $50,50022,0008,50013,000 8,50013,5002,600The 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.Required:1-a. Determine the present value of net cash flows using the total-cost approach. (Negative amounts should beindicated with a minus sign. Round discount factor(s) to 3 decimal place.)5,600Present Valueof Net CashFlowsPurchase the new truckO Keep the old truck1-b. Should Bilboa Freightlines keep the old truck or purchase the new one?Net present value2. Using the incremental-cost approach, determine the net present value in favor of (or against) purchasing the newtruck? (Negative amounts should be indicated with a minus sign. Round discount factor(s) to 3 decimal place.)

NPV is the present value of future cash flows less the initial investment.Replacement or keep…

es 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 8,500 13,000 13,500 2,600 Purchase the new truck Keep the old truck 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. 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 5,600 Purchase the new truck • 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

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 3ST