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 percent 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.

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Year 1 Year 2 Year 3 Operating costs Resale value 5000 8000 11000 18000 15000 5000