Long Haul Transport is considering replacing an existing semi-trailer truck with a more modern long-haul vehicle. The existing truck was purchased 5 years ago at a cost of $150,000 and is being depreciated over its useful life of 10 years at which point it is estimated to have a residual trade in value of $10,000. The existing truck has 5 years of usable life remaining and can currently be sold for $62,000 net.

The new long haul truck being considered will cost $210,000 plus $10,000 delivery from an interstate dealer. It will be depreciated over its useful life of 5 years having a residual value of $69,000 given it's still a relatively new vehicle and provide the benefit of reducing cash operating costs by $40,000 per annum (Note: Ignore Tax Implications)

(a)Based on a required return of 14 per cent cost of capital / time value of money, calculate the Net Present Value (Cost) of continuing to use the existingvehicle (option a - cash flows) versus purchasing the new vehicle (option b cash flows). As part of your answer interpret the meaning of the net present value / cost calculated. (Ignore tax implications. / show all working as part of your answer)

Additional information:

The present value of $1,ie. (1+r)^-nWhere: r = discount rate; n = number of periods until payment.

Discount rate (r) 14%

Periods (n) Present value of $1

1 0.877

2 0.769

3 0.675

4 0.592

5 0.519