Equipment replacement, net present value, relevant costs, payback. Monterey Corporation is a distributor of electronic measurement instruments. It is considering replacing one ofits dis¬

tribution trucks that it had purchased for $64,800 two years ago. The truck has a current book value of $45,600 and a remaining useful life offour years. Its current disposal price is $31,200; in four years its terminal disposal price is expected to be $7,200. The annual cash operating costs of the truck are expected to be $42,000 for each ofthe next three years and $48,000 in year 4.

Monterey is considering the purchase of a new truck for $67,200. Annual cash operating costs for the new truck are expected to be $30,000. The new truck has a useful fife offour years and a terminal disposal price of $9,600.

Monterey Corporation amortizes all its trucks using straight-line amortization cal¬

culated on the difference between the initial cost and the terminal disposal price divided by the estimated useful life. Monterey uses a rate ofreturn of 12% in its capital budgeting decisions.

Required 1. Using a net present value criterion, should Monterey Corporation purchase the new truck?

2. Compute the payback period for Monterey Corporation ifit purchases the new truck.