Advanced: Determining the optimum replacement period for a fleet of taxis Eltern 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

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

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Year 1 2 3 4 5 () () Operating costs Maintenance costs Resale value 23000 6800 24 500 () () () 26000 28000 44000 9200 13000 17000 28000 35 000 24000 12000 2000 200