Fifteen years ago the Acme Manufacturing Company bought a propane-powered forklift truck for $4800. The company depreciated the forklift using straight line depreciation, a 12-year life, and zero salvage value. Over the years, the forklift has been a good piece of equipment, but lately the maintenance cost has risen sharply. Estimated end-of-year maintenance costs for the next 10 years are as follows:
Year Maintenance Cost
1...................................$400
2...................................600
3...................................800
4...................................1000
5 - 10 ............................1400/year
The old forklift has no present or future net salvage value, as its scrap metal value just equals the cost to haul it away. A replacement is now being considered for the old forklift. A modem unit can be purchased for $6500. It has an economic life equal to its 10- year depreciable life. Straight-line depreciation will be employed, with zero salvage value at the end of the 10-year depreciable life. At any time the new forklift can be sold for its book value. Maintenance on the new forklift is estimated to be a constant $50 per year for the next 10 years, after which maintenance is expected to increase sharply. Should Acme Manufacturing keep its old forklift truck for the present, or replace it now with a new one? The firm expects an. 8% after-tax rate of return on its investments. Assume a 40% combined state-and-federal tax rate?