Acc423-San Jose Flights, S.A., of Panama, has a small truck that it uses for intracity deliveries.

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.

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