Question
A company has decided to replace 48 lorries in its current fleet. If the lorries are replaced immediately the price of of the new lorries
A company has decided to replace 48 lorries in its current fleet. If the lorries are replaced immediately the price of of the new lorries will be $135,000 each. In this case, the company should get a $500 per unit if sold.
If the company waits for another 3 years they expect a lower price of $120,000. However in this case, the company have to spend $6,700 for each unit in order to keep them road legal until they go out of commission in 3 years.
The old lorries can cater 250 jobs each per year. However, if the lorries are replaced it will incrase capacity by an extra 24 jobs each per year. The customers are charged $430 for each job. Drivers earn $80 per job as wage (each lorry has a separate driver).
The following are the other costs relating old and new vehicles
Dettails | NEW ($) | OLD ($) |
Fuel cost per lorry | 36,000 | 74,000 |
Annual manintenance cost per lorry | 10,000 | 5,000 |
Tax rate is 20%. Depreciaition rate applicable is25% on reducing balance method.
The net present value of project should be calculated using a real discount rate of 25%. The general infation rate is 4%.
All projects are assessed on a 10 year planning horizon.
Calculate the NPV, ARR & IRR for under oprtion - to replace immdeiately or to replace after 3 years.
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