A delivery service owns a small fleet of trucks which was purchased for $150,000 early in the company's fiscal year (same as the calendar year) 2014. It is expected that the fleet will last 2 more years from now and, at that time, will be worth $30,000.00 on the used truck market. Internally, the accountant is using a Sum of the Years Digits depreciation method and the government requires a Capital Cost allowance of 25%.

In anticipation of replacing the fleet, a junior engineer has come up with the following information.

The current market value of the fleet: $80,000. Value of the fleet if it is sold in one year: $57,000 Current year (2016) operating expenses: $30,000; expected to increase 15% per annum Price of the best available replacement option: $180,000 Economic life of the best available replacement option: 6 years Operating expenses for the replacement fleet: $20,000 per annum and expected to remain constant

The company's MARR is 10%. The company's corporate tax rate is 32%.

(a) What will the Undepreciated Capital Cost of the existing truck fleet be at the

end of 2016? (5 marks)

(b) What is the internal depreciation charge that the accountant will make at the

end of this fiscal year? (5 marks)

(c) What is the minimum Annual Equivalent Cost of the replacement fleet?

(5 marks)

(d) Should management keep the existing fleet as planned, or should it be

replaced with the new fleet now? Or in one year? Use a marginal cost analysis to justify your answer. (5 marks)

(e) Suppose that the fleet is sold at the end of 2016 for $80,000. Identify and enter

figures into all relevant T accounts of the 2016 general ledger. (5 marks)

2. A delivery service owns a small fleet of trucks which was purchased for $150,000 early in the company's fiscal year (same as the calendar year) 2014. It is expected that the fleet will last 2 more years from now and, at that time, will be worth $30,000.00 on the used truck market. Internally, the accountant is using a Sum of the Years Digits depreciation method and the government requires a Capital Cost allowance of 25%. In anticipation of replacing the fleet a junior engineer has come up with the following information. Current market value of the fleet: $80,000. Value of the fleet if it is sold in one year: $57,000 Current year (2016) operating expenses: $30,000, expected to increase 15% per annum Price of the best available replacement option: $180,000 Economic life of the best available replacement option: 6 years Operating expenses for the replacement fleet: $20,000 per annum and expected to remain constant The company's MARR is 10%. The company's corporate tax rate is 32%. (a) What will the Undepreciated Capital Cost of the existing truck fleet be at the end of 2016? (5 marks) (b) What is the internal depreciation charge that the accountant will make at the (c) What is the minimum Annual Equivalent Cost of the replacement fleet? (d) Should management keep the existing fleet as planned, or should it be end of this fiscal year? (5 marks) (5 marks) replaced with the new fleet now? Or in one year? Use a marginal cost analysis to justify your answer. (5 marks) e) Suppose that the fleet is sold at the end of 2016 for $80,000. Identify and enter figures into all relevant T accounts of the 2016 general ledger