Reference no: EM132594840

ABC is considering the replacement of five of its delivery trucks in its southern Ontario division. The existing trucks were bought 6 years ago for $55,000 each and have a remaining useful life of 5 years. The firm does not expect to realize any return from scrapping the old trucks in 5 years, but if they were sold now, the firm would receive $4,000 per truck.

The corporate planning department has recommended the purchase of ten new trucks to support customer demand over the next three years. The new trucks have a purchase price of $40,000 each, and an estimated useful life of three years with zero estimated salvage value. The new trucks are expected to economize on repair costs, routine maintenance, fuel and oils. For each of the old trucks these costs are estimated to be $5,000 per year for the next three years; if the new trucks are purchased, this figure will be $1,500 per truck. The company can also expect to average an increase in net revenues of $265,000 per year for each of the three years due to expanded customer service capability.

Each truck requires one driver at a cost of $21,000 per year. The firm uses an 25% after-tax cost of capital. The relevant capital cost allowance rate is 25% and the firm's tax rate is 45%.

Required:

Using an INCREMENTAL Net Present Value approach, evaluate the desirability of replacing the old trucks. (Do NOT present one solution for the new trucks and one solution for the old trucks.)