Equipment Replacement.

Lucky's Limo Service is considering the purchase of a new stretch limo which will cost

$42,500 and have an estimated salvage value of $5,000 at the end of its estimated useful life of five years. If Lucky purchases the new limo, it expects to have cost savings of $15,000 a year before depreciation and taxes. The savings represent a reduction in variable operating cost of $2 per hour for 7,500 operating hours.

The old limo to be replaced still has an estimated useful life of five years but has a zero book and cash value today. Lucky's required rate of return is 10 percent after taxes and the tax rate is 50 percent.

Required:

Based on the criterion of net present value, should Lucky's Limo Service purchase the new limo?

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