Ace Trucking Company is considering buying 50 new diesel trucks that are 15% more fuel-efficient than the ones the firm is now using. Mr. King, the president, has found that the company uses an average of 30 million litres of diesel fuel per year at a price of $1.08 per litre. If he can cut fuel consumption by 15%, then he will save $4,860,000 per year.

Mr. King assumes the price of diesel fuel is an external market force he cannot control, and any increased costs of fuel will be passed on to the shipper through higher rates. If this is true, then fuel efficiency would save more money as the price of diesel fuel rises (at $1.215/litre, he would save $5,467,500 in total if the buys the new trucks).

Mr. King has come up with two possible forecasts as shown below?each of which he believes has about a 50% chance of coming true.

Under Assumption One, diesel prices will stay relatively low; under Assumption Two, diesel prices will rise considerably.

Fifty new trucks will cost Ace Trucking $13.25 million. They will qualify for a 30% CCA. The firm has a tax rate of 30% and a cost of capital of 11%.

a)First, compute the yearly expected costs of diesel fuel for both assumption one (relatively low diesel prices) and assumption two (high diesel prices) from the forecasts below.