Replacement Basics without Considering Income-Tax Effects
Inland Trucking Company is considering the replacement of a 1,000 lb capacity
The truck was purchased three years ago at a cost of $15,000.
diesel-operated forklift truck was originally expected to have a useful life of eight
years and a zero estimated salvage value at the end of that period.
However, the truck
has not been dependable and is frequently out of service while awaiting repairs. The
maintenance expenses of the truck have been rising steadily and currently amount to
about $3,000 per year.
The truck could be sold now for $6,000.
If retained, the truck
will require an immediate $1,500 overhaul to keep it in operable condition.
overhaul will neither extend the originally estimated service life nor increase the value
of the truck.
The updated annual operating costs, engine overhaul cost, and market
values over the next five years are estimated as follows:
A drastic increase in O&M costs during the fifth year is expected as a result of
another overhaul, which will be required in order to keep the truck in operating
The firm’s MARR is 15%.
(a) If the truck is to be sold now, what will be its sunk cost?
(b) What is the opportunity cost of not replacing the truck now?
(c) What is the equivalent annual cost of owning and operating the truck for two more
(d) What is the equivalent annual cost of owning and operating the truck for five more
(a) Purchase cost = $15,000, market value = $6,000,
Sunk cost = $15,000 - $6,000 = $9,000
(b) opportunity cost = $6,000