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.

could you explain the process clearly and could you tell me the difference between residual value and written-down value? Thank you.