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 cost $78,000, is top of the line equipment. The truck has a life of 8 years, assuming the engine is rebulit on the fifth year.
Maintenance cost of $2,500 a year expected in the first four years, followed by total maintenance and rebuilding cost of $12,000 in the fifth year. During the last three years, maintenance cost are expected to be $4,000 a year. At the end of the 8 years the truck will have an estimated scrap value of $10,000.
The trucks B cost $46,000 a truck. Maintenance cost for the truck will be higher. In the first year they are expercted to be $4000 and this amount is expected to increase by $1,500 a year through the 8 year. In the fourth year the engine will need to be rebuilt, and this will cost the company $18,000 in addition to maintenance cost in that year. At the end of eight years the trucks will have an estimated scrap value of $7,000
1) using MACRS(5 years property) estimate the after-tax cash flows related to the trucks? (Use tax rate of 35%)
2) if ABC construction's opportunity cost of funds is 10%, which truck should it accept?
3) If its opportunity cost were 15% would you answer change?