SAQ 7.1

Bobjane Ltd bought a car for its sales director at a cost of 40,000. The car has annual operating costs of 12,000 and, because of the anticipated high mileage, it was expected that the car would be sold after three years for 10,000.

A week after buying the car, a fuel economy device became available in the market place which guaranteed to reduce the annual operating costs by 4000 per annum. The cost of this device was 9000.

In addition to this new development, a new model with the same specification as the director's car became available on the market at a cost of 34,000, with annual operating savings over the existing model (including the fuel economy device which is standard fitting) of 8000. This new model will also have a three year life and a final trade-in value of 10,000.

Bobjane was naturally interested in the new model but were told that the trade-in value of the car they had purchased one week ago would only be 15,000 because of its out-of-date technology.

Required:

Advise Bobjane Ltd on the financial implications of each of the following alternative courses of action.

a) Option 1 - keep the car and do nothing.

b) Option 2 - fit the fuel economy device to the car.

c) Option 3 - sell the car and buy the updated model.