(15) 2. ABC Construction must replace a number of its concrete mixer trucks with
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Question
(15) 2. ABC Construction must replace a number of its concrete mixer trucks with new trucks. It has received two bids and has evaluated closely the performance characteristics of the various trucks. The truck A, which costs $77,000, is top-of-the-line equipment. The truck has a life of eight years, assuming that the engine is rebuilt in the fifth year Maintenance costs of $3,000 a year are expected in the first four years, followed by total maintenance and rebuilding costs of $12,000 in the fifth year, During the last three years, maintenance costs are expected to be $4,000 a year. At the end of eight years the truck will have an estimated scrap value of $10,000.Explanation / Answer
Statement showing depreciation
For Truck A
Truck B
Statemnt showing present value of cash out flow
For truck A
For truck B
Since PV of cash out flow is less in truck A it should be selected
If opportunity cost = 15%
Truck A
Truck B
Decision won't change
(note: Tax has not been considered on scrape value . Assuming tax is not applicable on it)
Year Opening balance Depreciation rate Depreciation Closing balance 1 77000 20% 15400 61600 2 61600 32% 24640 36960 3 36960 19.20% 14784 22176 4 22176 11.52% 8870.4 13305.6 5 13305.6 11.52% 8870.4 4435.2 6 4435.2 5.76% 4435.2 0Related Questions
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