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The company you work for asks you to recommend whether their Mercedes truck should be replaced now or kept in service for an additional 10 years. The following data is provided to you: the truck can be sold now for $8,000 but it needs an engine overhaul that costs $4,000. Once this overhaul is complete, the truck will have maintenance expenses of $3,000 per year. At the end of 10 years, the truck will have a zero market value. A new truck costs $18,000 including tax, title, and license and would be used for 10 years with a market value of $4,000 at the end of the 10 years. However, maintenance expenses are predicted to be $1,000 for the new truck. All other costs such as fuel, oil, and insurance are the same for the old or new truck.

The company wishes to use a 10% interest as their internal rate of return. Should the existing truck be replaced?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M9760708

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