Fred is considering the replacement of a caravan he lets out for hire. He is planning to retire in six years' time and is therefore only concerned with that period of time, but cannot decide whether it is better to replace the caravan every two years or every three years. The following data have been estimated (all values at today's price levels): Purchase cost and trade-in values $ Cost of new caravan 20,000 Trade-in value of caravan: after two years 10,000 after three years 5,000 Annual costs and revenues Per year $ Caravan running cost 10,000 Lettings charged to customers, that is revenue for Fred Caravan servicing and repair costs 20,000 Caravan servicing and repair costs depend on the age of the caravan. In the following table, year 1 represents the cost in the first year of the caravan ownership; year 2 represents the cost in the second year of ownership etc.: Year 1 Year 2 Year 3 $ 500 2,500 4,000 Inflation New caravan costs and trade in-values are expected to increase by 5% per year. Caravan running costs and lettings are expected to increase by 7% per year. Caravan servicing and repair costs are expected to increase by 10% per year. Required Advise Fred on the optimum replacement cycle for his caravan and state the net present value of the opportunity cost of making the wrong decision. Use a discount rate of 12% per year. Ignore taxation.