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.
Required:
1) Identify the cash flows for each alternative by completing the following table: $$\begin{array} { | c | c | l | l | l | }
\hline &{ \text { Keep Existing Truck } } &&{ \text { Replace Existing Truck } } \
\hline \text { Year } & \text { Cash Outflows } & \text { Cash Inflows } & \text { Cash Outflows } & \text { Cash Inflows } \
\hline 0 & & & & \
\hline 1 & & & & \
\hline 2 & & & & \
\hline 3 & & & & \
\hline 4 & & & & \
\hline
\end{array}$$
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? $$\begin{array} { | c | c | c | c | c | c | c | }
\hline & & { \text { Keep Existing Truck } } & { \text { Replace Existing Truck } } \
\hline & & & \text { Present Value of } & & & \
\hline & 14 \% & \text { Net Cash } & \text { Net Cash } & & \text { Net Cash } & \text { Present Value of Net } \
\hline \text { Year } & \begin{array} { c }
\text { PV } \
\text { Factor }
\end{array} & \text { Outflows } & \text { Outflows } & & \text { Outflows } & \text { Cash Outflows } \
\hline 0 & & & & & \
\hline 1 & & & & & \
\hline 2 & & & & & & \
\hline 3 & & & & & & \
\hline 4 & & & & & & \
\hline
\end{array}$$

Question

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.
Required:
1) Identify the cash flows for each alternative by completing the following table: $$\begin{array} { | c | c | l | l | l | } 
\hline &{ \text { Keep Existing Truck } } &&{ \text { Replace Existing Truck } } \
\hline \text { Year } & \text { Cash Outflows } & \text { Cash Inflows } & \text { Cash Outflows } & \text { Cash Inflows } \
\hline 0 & & & & \
\hline 1 & & & & \
\hline 2 & & & & \
\hline 3 & & & & \
\hline 4 & & & & \
\hline
\end{array}$$ 
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? $$\begin{array} { | c | c | c | c | c | c | c | } 
\hline & &  { \text { Keep Existing Truck } } &  { \text { Replace Existing Truck } } \
\hline & & & \text { Present Value of } & & & \
\hline & 14 \% & \text { Net Cash } & \text { Net Cash } & & \text { Net Cash } & \text { Present Value of Net } \
\hline \text { Year } & \begin{array} { c } 
\text { PV } \
\text { Factor }
\end{array} & \text { Outflows } & \text { Outflows } & & \text { Outflows } & \text { Cash Outflows } \
\hline 0 & & & & & \
\hline 1 & & & & & \
\hline 2 & & & & & & \
\hline 3 & & & & & & \
\hline 4 & & & & & & \
\hline
\end{array}$$

Quizplus · Accepted Answer

The Answer of 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.
Required:
1) Identify the cash flows for each alternative by completing the following table: $$\begin{array} { | c | c | l | l | l | } 
\hline &{ \text { Keep Existing Truck } } &&{ \text { Replace Existing Truck } } \
\hline \text { Year } & \text { Cash Outflows } & \text { Cash Inflows } & \text { Cash Outflows } & \text { Cash Inflows } \
\hline 0 & & & & \
\hline 1 & & & & \
\hline 2 & & & & \
\hline 3 & & & & \
\hline 4 & & & & \
\hline
\end{array}$$ 
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? $$\begin{array} { | c | c | c | c | c | c | c | } 
\hline & &  { \text { Keep Existing Truck } } &  { \text { Replace Existing Truck } } \
\hline & & & \text { Present Value of } & & & \
\hline & 14 \% & \text { Net Cash } & \text { Net Cash } & & \text { Net Cash } & \text { Present Value of Net } \
\hline \text { Year } & \begin{array} { c } 
\text { PV } \
\text { Factor }
\end{array} & \text { Outflows } & \text { Outflows } & & \text { Outflows } & \text { Cash Outflows } \
\hline 0 & & & & & \
\hline 1 & & & & & \
\hline 2 & & & & & & \
\hline 3 & & & & & & \
\hline 4 & & & & & & \
\hline
\end{array}$$

Bruce Company Is Considering Replacing One of Its Delivery Trucks