TS operates a fleet of vehicles and is considering whether to replace the vehicles on a one,
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TS operates a fleet of vehicles and is considering whether to replace the vehicles on a one, two or three year cycle.
Each vehicle costs $25 000. The operating costs per vehicle for each year and the resale value at the end of each year are as follows:
The cost of capital is 6 per cent per annum.
Required:
Calculate the optimum replacement cycle for the vehicles. You should assume that the initial investment is incurred at the beginning of year 1 and that all other cash flows arise at the end of the year.
(5 marks)
CIMA P1 Performance Operations
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