Abu Company flies vintage aircraft at air shows and has a fleet of three airplanes. One of the airplanes cost $250,000 to purchase ten years ago and now has a book value of $75,000. The company is considering replacing this airplane with a different type which will cost $350,000. The current airplane could be sold for $60,000. If the company buys the new airplane, it is expected that annual fuel costs will decrease from $70,000 to $45,000 and annual maintenance costs will decrease from $70,000 to $30,000. Both the current airplane and the new airplane will have a service life of ten years. At that time, both airplanes would have to be scrapped with no recovery value. The company is considering whether they should replace the existing aircraft with a a new airplane. a) Is the original purchase price of the existing aircraft relevant? b) Is the book value of the existing aircraft relevant? c) Is the sales value of the existing aircraft relevant? Prepare a retain vs. replace analysis and answer the following questions. d) What are the total relevant fuel costs for the new aircraft? $ e) What are the total relevant maintenance costs for the new aircraft? $ f) What are the total of all relevant costs for the "retain" portion of this analysis? $ g) What are the total of all relevant costs for the "replace" portion of this analysis? $ i) should the company retain the existing aircraft or replace it? j) What is the incremental difference between the two options? $ Abu Company flies vintage aircraft at air shows and has a fleet of three airplanes. One of the airplanes cost $250,000 to purchase ten years ago and now has a book value of $75,000. The company is considering replacing this airplane with a different type which will cost $350,000. The current airplane could be sold for $60,000. If the company buys the new airplane, it is expected that annual fuel costs will decrease from $70,000 to $45,000 and annual maintenance costs will decrease from $70,000 to $30,000. Both the current airplane and the new airplane will have a service life of ten years. At that time, both airplanes would have to be scrapped with no recovery value. The company is considering whether they should replace the existing aircraft with a a new airplane. a) Is the original purchase price of the existing aircraft relevant? b) Is the book value of the existing aircraft relevant? c) Is the sales value of the existing aircraft relevant? Prepare a retain vs. replace analysis and answer the following questions. d) What are the total relevant fuel costs for the new aircraft? $ e) What are the total relevant maintenance costs for the new aircraft? $ f) What are the total of all relevant costs for the "retain" portion of this analysis? $ g) What are the total of all relevant costs for the "replace" portion of this analysis? $ i) should the company retain the existing aircraft or replace it? j) What is the incremental difference between the two options? $
