Reference no: EM132587783

A trucking company in Central Luzon has a fleet of 15 units of 10-wheeler trucks which are used in hauling sand and gravel from the provinces to Metro Manila. Ten of the fifteen trucks were purchased five years ago and the other five units were purchased only recently. Due to the frequent breakdowns, the old trucks could make only an average of 14 trips per month. Fuel consumption per trip also reaches an average of P3200. Average maintenance cost per truck per month is P12,000. It is estimated that these old trucks can still be sold for P180,000 per unit, and that they can still be operated at least for the next two years.

New trucks could make an average of 22 trips per month. They were purchased at 1,200,000 each only two months ago. It is estimated that the maintenance cost would average P3200 per month. Fuel consumption was recorded at P1,800 per trip. Interest rate on capital investment is 18%.

Question 1: All other out of pocket cost for the old and new trucks are equal. The company has an average income of P800 per trip. Because of the frequent breakdowns and high fuel consumption of the old units, the owner would like to know if it is time to replace his old units. Will it be profitable to change the old trucks at this time? Support your answers with computations. Economic life of the new trucks is 5 years.(Use ROR and Annual Cost)