Pronto Corp. wants to decide whether to overhaul an existing truck or buy a new one.

The old truck was purchased two and a half years ago for $30,000 and is being depreciated using the straight-line method using the half-year convention (five year class for tax purposes). The cash operating costs of the old truck total $18,000 per year. To enable the truck to last four more years, an overhaul costing $7,000 is needed. Assume that the overhaul will be expensed for tax purposes. If the truck is overhauled, it is estimated to have a salvage value of $10,000.

The new truck would cost $45,000 and is expected to have annual operating costs of $8,000. If the new truck is purchased it is expected to be disposed of at the beginning of its fifth year for $15,000. Assuming the new truck is purchased, the old truck can probably be sold as is for $5,000. MACRS depreciation with a five-year life will be used for the new truck. The cost of capital is 10% and the tax rate is 40%.

Assuming that the company purchases the new truck, what are the total after-tax proceeds from selling the old truck? What are the after-tax proceeds from selling the new truck?

a. <$2,500>

b. $5,000

c. $7,000

d. $10,200