Reference no: EM132731671
A firm is considering the replacement of ten of its delivery trucks. The existing trucks were bought 6 years ago for $25,000 each and have a remaining useful life of 3 years. The firm does not expect to realize any return from scrapping the old trucks in 3 years, but if they were sold now, the firm would receive $4,000 per truck.
Five new trucks are expected to do the work of the ten old ones. The new trucks have a purchase price of $40,000 each, and an estimated useful life of three years and 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.
Each truck requires one driver at a cost of $21,000 per year. The firm used an 18% after-tax cost of capital. The relevant capital cost allowance rate is 20% and the firm's tax rate is 40% .
REQUIRED:
Using an INCREMENTAL Net Present Value approach, evaluate the desirability of replacing the old trucks. (Do NOT present one solution for the old truck and one solution for the new trucks)
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