Edgeley Inc., a logistics operator located in Concord, Ontario, is considering replacing one of its tractor trailers (informally known as a 53’ truck). The truck was purchased for $64,800 two years ago, has a current book value of $45,600, and a remaining useful life of four years. Its current disposal price is $31,200; in four years its terminal disposal price is expected to be $7,200. The annual cash operating costs of the truck are expected to be $42,000 for each of the next three years and $48,000 in year 4. Edgeley is considering the purchase of a new 53’ truck for $67,200. Annual cash operating costs for the new truck are expected to be $30,000. The new truck has a useful life of four years and a terminal disposal price of $9,600. Edgeley Inc. amortizes all its trucks using straight-line amortization calculated on the difference between the initial cost and the terminal disposal price divided by the estimated useful life. Edgeley uses a rate of return of 12% in its capital budgeting decisions.
REQUIRED
1. Using a net present value criterion, should Edgeley Inc. purchase the new truck?
2. Compute the payback period for Edgeley Inc. if it purchases the new 53’ truck.