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A start - up business is considering acquiring a long - haul truck and has narrowed the selection down to two options. The first option
A startup business is considering acquiring a longhaul truck and has narrowed the selection down to two options. The first option is to purchase a new truck for R At the end of the seventh year, the resale value of the new truck is estimated to be R The second option is to purchase a used truck for R At the end of the fourth year, the resale value of the used truck is estimated to be R
Revenues from deliveries made will be the same for either truck. However, the operating costs fuel repairs and maintenance, as well as insurance will differ between the two trucks. Beforetax operating costs will be R and R for the first year for the new and used truck, respectively. The operating costs will increase in line with inflation at a rate of per year from the beginning of the second year. Depreciation wearandtear allowance is written off on the trucks on a straightline basis over four years.
The business' cost of capital is and the corporate tax rate is
Required:
Using the relevant calculations, advise the business on which truck to purchase.
Hint: Ineed to calculate the Net Present Cost NPC and Equivalent Annual Costs EAC of each truck and make recommendations.
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