Suppose FedEx is considering which of two delvery trucks to purchase.The german model will cost $75000,will have expense(excluding depreciation) of $25000per year,and will have a useful life of three years.The janase model will cost $100000,will have expenses(excluding depreciation) of $240000 per year and will have useful life of four years.Suppose FedEx uses straight line depreciation and pays taxes at a 40% rate.The cost of capital for the projrct is 12%.The slvage value are $ 15000 for the German model and $12000 for the japanese model.
Suppose FedEx could refit either model of delivery trucks at the end of its estimated useful life.An expenditure of $5,000 would extend either truck's life by one year.Operating expenses would be $10,000 higher in the extra year for either truck.Alternatively,spending $10,000 would extend either truck's original estimated life by two years.Operating expenses would be $20000 per year higher in the extra years under this alternative. The depreciation schedules would remain as given above.Estimated salvage value for the one and two years extension are respectively,$12000 and $10000 for the german truck and $10000 and $8000 for the japanese truck.
What is the optimal replacement cycle for each truck? whick one should FedEx purchase.