Frank’s Marine Service purchased a forklift five years ago for \($16,000\). When it was purchased, the forklift had an estimated useful life of 10 years and a residual value of $4,000.

The forklift can be sold now for \($6,000\). The operating cost for the forklift is \($4,500\) per year.

Frank is thinking about buying a newer forklift for \($17,000\). The newer forklift would have an estimated useful life of five years and a residual value of \($7,000\). The operating cost for the newer forklift would be 3,000 per year.

The company’s cost of capital is 10 percent.

Required:

a. Prepare a relevant cost schedule showing the benefits of buying the new forklift. (For this requirement, ignore the time value of money.)

b. How much must the company invest today to replace the old forklift?

c. If the company replaces the old forklift, what is the increase in the company’s annual contribution margin?

d. If the company sells the old forklift now to make room for the new one, it will not receive the \($4,000\) residual value at the end of its useful life. Instead, the company will receive the \($7,000\) residual value from the new forklift. With this in mind, if the company buys the forklift, what is the change in the residual value the company is to receive at the end of the five-year life of the equipment?

e. Calculate the net present value of replacing the old forklift.

f. Do you think the company should replace the old forklift?