Reference no: EM132154568

A motor vehicle costs $20,000 and is expected to have a trade-in value of $16,000 at the end of year 1, $12,000 at the end of year 2, $8,000 at the end of year 3, $6,000 at the end of year 4 and $2,000 at the end of year 5. Cost of maintenance is expected to be $1,250 pa for each of the first two years, $1,500 for the third year, $2,000 for year four and $5,000 for year five. An additional major overhaul is expected in year three costing $1,500, if the life is extended beyond three years. Opportunity cost is 15%. What is the optimal replacement period: every 1, 2, 3, 4 or 5 years?