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Speedy Pty Ltd operates a suburban delivery business. It is considering the replacement of a 2-ton...

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Accounting

Speedy Pty Ltd operates a suburban delivery business. It isconsidering the replacement of a 2-ton van with a 3-ton van. Detailof the respective vehicles are as follows:

2-ton truck3-ton truck
Remaining life3 yearsestimated life4 year
salvage value now$4,000salvage value in 4 years$2,000
salvage value in 3 years$0Annual depreciation for tax purposes$6,000
written down value now$7,600Cost$24,000
Annual Depreciation for tax purposes$2,200
Annual net cash flows before tax$14,000annual net cash flow before tax$22,000

The after-tax cost of capital 10%pa and the tax rate is 30%.Management is considering the following alternatives: replace nowor Replace in three years which alternative should be accepted?Explain your decision.

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Cash flow if replace now is    See Answer
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