ABC is considering replacing its two old truck with two new modern truck. Currently, ABC food trucks which generating annual revenue of $15,000,000. However with the current trucks, ABC food truck business is facing limited capacity to accommodate additional staff in the truck to cook and to service the rising customers demand.

Telling Auto is specialises in modify and selling truck, it willing to sell it modern truck to ABC at $200,000 per truck. At the same time, ABC is able to trade in both the old truck to Telling Auto for a total $230,000. The new truck will be depreciated using the straight-line method over useful life 8 years.

One of the old truck was bought 6 year ago at $180,000 when ABC started the business. While the second truck was bought 3 year ago at $190,000. Both old trucks were benign depreciated using the straight-line method over an estimated useful life of 8 year. If the old trucks are not replaced today, it can still be used for another 5 years before being disposed at $80,000 per truck.

ABC hopes to sell off its food truck business in 5 years time to start a chain of restaurant. The salvage value of the new truck is estimated to be $70,000 per truck in 5 years

If the old trucks are replaced today, it is estimated that this will help to raise the company revenue by $300,000 per annum. This would also lead to some change in its operating cost as following: Old trucks New track Salary- $50,000 $80,000 Fuel costs- $ 5,000 $ 4,500 Services & repair- $ 3,000 $ 1,500

In addition it is estimated that the company inventory would need to be raise by $5,000 if new trucks are bought today. At the end of year 5, 50% of this amount is recoverable.

The company debt-quirky ratio is 0.25 while its cost of equity is 11.5% annum, cost of debt is 8.5% annum. Tax rate is 30%

Question i) calculate the companys weighted average cost of capital.

ii) calculate the relevant PV of cash flows with Net PV basis. Determine whether ABC need to purchase new truck to replace old truck?