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Gilboa Freightlines, S


Gilboa 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): 
Present Truck New Truck 
Purchase cost new S 37,000 50,500 
Remaining book value 22,000 -
Overhaul needed now 8,500 -
Annual cash operating costs 13,000 8,500 
Salvage value now 13,500 -
Salvage value eight years from now 2,600 5,600 

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. All investment projects are evaluated using a 16% discount rate. 

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.) 

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? 

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