Speedy Pty Ltd operates a suburban document delivery business. It is considering the replacement of a 2-tonne truck with a 3-tonne truck. Details of the respective vehicles are as follows:

2-tonne truck: Remaining life 5 years

Residual value: Now $6000

In 4 years $0

Written-down value (for tax purposes)$7500(before taxation)

Depreciation(for tax purposes)$1200 pa

Net cash flow(before taxation)$12000 pa

3-tonne truck: Estimated life 6 years

Cost$25 000

Residual value after 6 years'operation$2000

Deprecation(allowable for tax purposes) $4000 pa

Net cash flow$20 000 pa

Other information is as follows:

i). Net cash flows are to be regarded as received at the end of each year

ii). The effective after-tax cost of capital is 10% pa

iii). The company income tax rate is 30 cents in the dollar.

Management is considering the following alternatives:

a)Replace the 2-tonne truck with the 3-tonne truck now.

b)Replace the 2-tonne truck with the 3-tonne truck in 5 years'time.

All other alternative may be ignored. Advise management as to which alternative it should adopt, and justify your analysis.

I'm confused about what is difference between residual value and written-down value and in question b), how to deal with 2-tonne truck's residual value?