Western Fleet Ltdoperates a fleet of limousines. It is currently considering replacing them with a new model. A decision must be made to replace the old limousines with new now or alternatively at the end of the physical life of the old limousines in 3 years. The required rate of return is 10%. The company plans to evaluate options based on the following information for each vehicle replaced:

Item. Old Limousines New Limousines

Net cash flows $40,000 p.a. $70,000 p.a.

Cost - $300,000

Estimated Life 3 years 7 years

Disposal Value:

at present $20,000

Disposal Value:

in 7 years - $40,000

Required rate

of return (real). 10% p.a. 10% p.a.

Should Luxury Fleet replace the old limousines now or later?