Question

Speedy Pty Ltd operates a suburban delivery business. It is considering the replacement of a 2-ton van with a 3-ton van. Detail of the respective vehicles are as follows:

2-ton truck		3-ton truck
Remaining life	3 years	estimated life	4 year
salvage value now	$4,000	salvage value in 4 years	$2,000
salvage value in 3 years	$0	Annual depreciation for tax purposes	$6,000
written down value now	$7,600	Cost	$24,000
Annual Depreciation for tax purposes	$2,200
Annual net cash flows before tax	$14,000	annual net cash flow before tax	$22,000

The after-tax cost of capital 10%pa and the tax rate is 30%. Management is considering the following alternatives: replace now or Replace in three years which alternative should be accepted? Explain your decision.

Answer 1

Cash flow if replace now is =$37416.94

Cash flow if replace in 3 years =$36382.76

Positive cash flow if replace now by $1034.18

PV factor @10% cost of capital

Year	10%
1	0.909
2	0.826
3	0.751
4	0.683
5	0.621
6	0.564
7	0.513