An organisation has recently purchased a company car for one of its senior managers at a cost of £25 000 and is trying to determine the most suitable time for replacement. It is estimated that the car will depreciate by £5000 in the first year, £2000 in each of the next two years and £3000 in each of the next two years. Running costs in the first year are estimated at £5000 and are estimated to increase by 15 per cent per annum thereafter.

(a) Determine a suitable time for replacing the car.

(b) The company has a capital cost for such projects of 5 per cent per annum and expects inflation to average 2 per cent per annum over the foreseeable future.

Using present-value techniques determine a suitable replacement time for the vehicle.