A company is considering replacing one of its delivery trucks that it had purchased for $54,000 two years ago. This truck was estimated to have a six year life, a $12,000 salvage value, and it is being depreciated on a straight line basis. Its current market value is $26,000 now and is estimated to be $6,000 in four years. The annual cash operating costs of the old truck are expected to be $35,000 for each of the next 3 years and $40,000 in year 4.
The new truck would cost $56,000. Annual cash operating costs are expected to be $25,000 per year over its expected life of 4 years. At that time, it is estimated that the new truck could be sold for $8,000. If the company uses a rate of return of 14% for capital budgeting decisions, should the company buy the new truck?