(Calculating replacement project cash flows) (Related to Checkpoint 12.2 on page 418) Madrano’s Wholesale Fruit Company, located in McAllen, Texas, is considering the purchase of a new fleet of trucks to be used in the delivery of fruits and vegetables grown in the Rio Grande Valley of Texas. If the company goes through with the purchase, it will spend $400,000 on eight rigs. The new trucks will be kept for five years, during which time they will be depreciated toward a $40,000 salvage value using straight-line depreciation. The rigs are expected to have a market value in five years equal to their salvage value. The new trucks will be used to replace the company’s older fleet of eight trucks, which are fully depreciated but can be sold for an estimated $20,000 (because the older trucks have a current book value of zero, the selling price is fully taxable at the firm’s 30 percent tax rate). The existing truck fleet is expected to be usable for five more years, after which time the rigs will have no salvage value. The existing fleet of trucks uses $200,000 per year in diesel fuel, whereas the new, more efficient fleet will use only $150,000. In addition, the new fleet will be covered under warranty, so the maintenance costs per year are expected to be only $12,000 compared to $35,000 for the existing fleet.

a. What are the differential operating cash flow savings per year during Years 1 through 5 for the new fleet?

b. What is the initial cash outlay required to replace the existing fleet with the newer trucks?

c. Sketch a timeline for the replacement project cash flows for Years 0 through 5.

d. If Madrano requires a 15 percent discount rate for new investments, should the fleet be replaced?