As part of expanding business to serve existing and potential Cattle farm clients and improving delivery services, management has been considering replacing its trucks with a newer, more fuel-efficient fleet for some time. The company has approached a local truck dealer and has got a deal to purchase 10 trucks for 125,000 each. Each new truck would be depreciated towards a salvage value of $50,000 over five years. Upon purchasing the new trucks, the company will sell its existing 10 used trucks to the dealer for their book value of $350,000. The existing fleet will be fully depreciated in one more year but is expected to be serviceable for five more years, at which time the vehicles would be worth only $5000 per unit as scrap. The new fleet is much more fuel-efficient and will require only $250,000 per year in fuel costs compared with $350,000 for the existing old fleet. In addition, the new fleet will require lower maintenance costs over the next five years, equal to an estimated $ 150,000 per year compared with the almost $400,000 currently being spent to keep the older fleet running. Assume a tax rate of 30%

Questions:

a) What are the differential operating cash flow savings per year considering management's plan during years 1 to 5? Report the results in a Table and show calculation steps under the table. (2 marks)

b) Report the free cash flows associated with the replacement decision in a table. Decide whether the fleet should be replaced if the discount rate for investing in the new fleet is 12%. Show calculations using the appropriate method and provide justifying arguments that support your decision (8 marks)