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) Kunura Fleet Ltd operates a fleet of limousines. It is currently considering replacing them with a new model. A decision must be made to

) Kunura Fleet Ltd operates a fleet of limousines. It is currently considering replacing them with a new model. A decision must be made to replace the old limousines with new now or alternatively at the end of the physical life of the old limousines in 4 years. The required rate of return is 9%. The company plans to evaluate options based on the following information for each vehicle replaced:

Item

Old Limousines

New Limousines

Net cash flows

$40,000 p.a.

$70,000 p.a.

Cost

-

$300,000

Estimated Life

4 years

7 years

Disposal Value: at present

$20,000

Disposal Value: in 7 years

-

$40,000

Required rate of return (real)

9% p.a.

9% p.a.

Should Luxury Fleet replace the old limousines now or later?

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