(Equivalent Annual Cost) Company X is choosing a policy on the age at which to replace truck in its fleet. There are 2 choices: Replace at 10 years or replace at 15 years. The cost of a new truck is $25,000. Annual maintenance cost are $1000 per year in the first 10 year, and $3000 per year 11-15. Salvage value of a truck is $6000 after 10 years, and $1000 after 15 years. All cash flows are after tax. Discount rate = 10%.
What is the NPV (of net cost) for a 10-year replacement strategy? (Hint: the new truck cost should be counted at time 0.)
What is the equivalent Annual Cost of a 10- year replacement strategy?
What is the NPV (of net cost) for a 15-year replacement strategy?
What is the Equivalent Annual Cost of 15-year replacement strategy?
Which Strategy Should Company X pursue?
10-year replacement vs. 15-year replacement