The owner of a taxi company is considering the replacement of his vehicles. He is planning to retire in six years’ time and is therefore only concerned with that period of time, but cannot decide whether it is better to replace the vehicles every two years or every three years.

The following data have been estimated (all values at today’s price levels);

Purchase cost and trade-in values

Annual costs and revenues

Vehicles servicing and repair costs

Vehicle servicing and repair costs depend on the age of the vehicle. In the following table year 1 represents the cost in the first year of the vehicle’s owner; year 2 represents the cost in the second year of ownership, and so on:

Inflation

New vehicle costs and trade in-values are expected to increase by 5 percent per year.

Vehicle running costs and fares are expected to increase by 7 percent per year. Vehicle servicing and repair costs are expected to increase by 10 percent per year.

Required:

Advise the company on the optimum replacement cycle for its vehicles and state the net present value of the opportunity cost of making the wrong decision. Use a discount rate of 12 percent per year. All workings and assumptions should be shown. Ignore taxation.
 
 
 

Taxi cost Trade-in value of tax after 2 years after 3 years 15.000 7.000 4000