Bruce Company Is Considering Replacing One of Its Delivery Trucks

Essay

Bruce Company is considering replacing one of its delivery trucks.The truck in question was purchased two years ago at a cost of $41,000.At the time of purchase the truck was expected to have a $5,000 salvage value at the end of its six-year life.Given the use of straight-line depreciation,the truck has a current book value of $29,000.If sold today,the company could get $22,000 for the truck.It costs $20,000 per year to operate the existing truck.The new truck would cost $46,000 and would cost only $14,000 per year to operate.The new truck would be depreciated on a straight-line basis over its four-year useful life to its expected salvage value of $10,000.The company's required rate of return is 14%.Ignore income taxes.
(PV of $1 and PVA of $1)(Use appropriate factor(s)from the tables provided.)
Required:
1)Identify the cash flows for each alternative by completing the following table:
$$\begin{array} { | c | c | c | c | c | } \hline &{ \text { Keep Existing Truck } } && { \text { Replace Existing Truck } } \\\hline \text { Year } & \text { Cash Outflows } & \text { Cash Inflows } & \text { Cash Outflows } & \text { Cash Inflows } \\\hline 0 & & & & \\\hline 1 & & & & \\\hline 2 & & & & \\\hline 3 & & & & \\\hline 4 & & & & \\\hline\end{array}$$
2)The company's objective is to minimize costs.Complete the following table to determine whether the existing truck should be replaced.Ignore income taxes.What is your recommendation?
$\begin{array}{|c|c|c|c|c|c|c|}\hline&&\text { Keep Existing Truck } & &&\text { Replace Existing Truck }\\\hline&14 \% \mathrm{PV} & \text { Net Cash } & \text { Present Value of } && \text { Net Cash } & \text { Present Value of }\\\text { Year } & \text { Factor } & \text { Outflows } & \text { Net Cash Outflows } & & \text { Outflows }& \text { Net Cash Outflows } \\\hline 0 & & & & \\\hline 1 & & & & & \\\hline 2 & & & & & \\\hline 3 & & & & & \\ \hline 4 & & & & & \\\hline\end{array}$