A business owns a fleet of identical motor vehicles. It wishes to replace these vehicles after either three or four years. Each one costs £10 000 to replace with a new vehicle. If the business replaces the vehicles after three years it can trade in the old vehicles for £5000 each

£5000. If it retains the vehicles for a further year the trade-in price falls to £4000. Assuming that the business regards a 15 per cent discount rate as appropriate, which trade-in policy will be cheaper?

Assume that the running costs of the vehicles, ignoring depreciation, are identical each year.