Work Ch 6 value: 2.14 points Exercise 6-17A Opportunity cost LO 6-5 Brewton Frei

Question

Work Ch 6 value: 2.14 points Exercise 6-17A Opportunity cost LO 6-5 Brewton Freight Company owns a truck that cost $33,000. Currently, the truck's book value is $24,000, and its expected remaining useful life is five years . Brewton has the opportunity to purchase for $26,000 a t truck that is extremely fuel efficient. Fuel cost for the old truck is expected to be $6,100 per year more than fuel cost for the new truck. The old truck is paid for but, in spite of being in good condition, can be sold for only $17,000. Required a. Calculate the total relevant costs Keep Old Replace New b. Should Brewton replace the old truck with the new fuel-efficient model, or should it continue to use the old truck until it wears out? Replace the old truck Continue to use the old truck Worksheet

Explanation / Answer

Calculate the total relevant costs for the old and the new. Keep Old Truck Purchase New Truck Opportunity Cost $17,000.00 Cost of new truck $26,000.00 Additional Fuel Cost = 5 x $6100 $30,500.00 Total Relevant Cost $47,500.00 $26,000.00 The original cost and book value of the old truck are sunk cost and are therefore not relevant. b. Should Brewton replace the old truck with the new fuel-efficient model, or should it continue to use the old truck until it wears out? Replace the old truck The analysis suggests that it costs less to rep?lace the truck that to continuing operating it.

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