Fed Extra Company is considering replacing 10 of its delivery vans that originally cost USD 30,000...

 

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Fed Extra Company is considering replacing 10 of its delivery vans that originally cost USD 30,000 each; depreciation of USD 18,750 has already been taken on each van. The vans were originally estimated to have useful lives of eight years and no salvage value. Each van travels an average of 150,000 miles per year. The 10 new vans, if purchased, will cost USD 36,000 each. Each van will be driven 150,000 miles per year and will have no salvage value at the end of its three-year estimated useful life. A trade-in allowance of USD 3,000 is available for each of the old vans. Following is a comparison of costs of operation per mile: Fuel, lubricants, etc. Old vans $ 0.152 0.067 New vans $ 0.119 0.067 Tires Repairs 0.110 0.087 Depreciation 0.025 0.080 Other operating costs 0.051 0.043 Operating costs per mile $ 0.405 $ 0.396 Use the payback period method for (a) and (b). a. Do you recommend replacing the old vans? Support your answer with computations and disregard all factors not related to the preceding data. b. If the old vans were already fully depreciated, would your answer be different? Why? c. Assume that all cost flows for operating costs fall at the end of each year and that 18 per cent is an appropriate rate for discounting purposes. Using the net present value method, present a schedule showing whether or not the new vans should be acquired. Fed Extra Company is considering replacing 10 of its delivery vans that originally cost USD 30,000 each; depreciation of USD 18,750 has already been taken on each van. The vans were originally estimated to have useful lives of eight years and no salvage value. Each van travels an average of 150,000 miles per year. The 10 new vans, if purchased, will cost USD 36,000 each. Each van will be driven 150,000 miles per year and will have no salvage value at the end of its three-year estimated useful life. A trade-in allowance of USD 3,000 is available for each of the old vans. Following is a comparison of costs of operation per mile: Fuel, lubricants, etc. Old vans $ 0.152 0.067 New vans $ 0.119 0.067 Tires Repairs 0.110 0.087 Depreciation 0.025 0.080 Other operating costs 0.051 0.043 Operating costs per mile $ 0.405 $ 0.396 Use the payback period method for (a) and (b). a. Do you recommend replacing the old vans? Support your answer with computations and disregard all factors not related to the preceding data. b. If the old vans were already fully depreciated, would your answer be different? Why? c. Assume that all cost flows for operating costs fall at the end of each year and that 18 per cent is an appropriate rate for discounting purposes. Using the net present value method, present a schedule showing whether or not the new vans should be acquired.

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ANSWER A When determining the replacement cost of an asset a business must account for its depreciation to expense its cost over its useful life To ca... View the full answer