Advanced: Determining the optimum replacement period for a fleet of taxis Eltem pic is an unlisted company with a turnover of £6 million which runs a small fleet of taxis as part of its business. The managers of the company wish to estimate how regularly to replace the taxis. The fleet costs a total of £55 000 and the company has just purchased a new fleet. Operating costs and maintenance costs increase as the taxis get older. Estimates of these costs and the likely resale value of the fleet at the end of various years are presented below.

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Year 1 2 3 4 5 () () () () () Operating costs 23 000 24 500 26000 28 000 44 000 Maintenance 6800 9200 13 000 17000 28 000 costs Resale value 35 000 24000 12000 2000 200 The company's cost of capital is 13% per year. Required: (a) Evaluate how regularly the company should replace its fleet of taxis. Assume all cash flows occur at the year end and are after taxation (where relevant). Inflation may be ignored. (10 marks) (b) Briefly discuss the main problems of this type of evaluation. (4 marks) ACCA Level 3 Financial Management