San Jose Flights, 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. (Panama uses the U.S. dollar as its currency):
|
Present Truck |
New Truck |
|
|
Purchase cost new |
28,000 |
42,000 |
|
Remaining book value |
18,000 |
|
|
Overhaul needed now |
9,500 |
|
|
Annual cash operating costs |
14,000 |
11,000 |
|
Salvage value-now |
10,000 |
|
|
Salvage value-10 years from now |
2,000 |
4,000 |
If the company keeps and overhauls its present delivery truck, then the truck will be usable for 10 more years. If a new truck is purchased, it will be used for 10 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.
The company computes depreciation on a straight-line basis. All investment projects are evaluated using a 16% discount rate.
Required:
1. Should San Jose Flights, S.A. keep the old truck or purchase the new one? Use the total-cost approach to net present value in making your decision. Round to the nearest whole dollar.
2. Redo (1) above, this time using the incremental-cost approach.