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 truck | | 3-ton truck | |
| Remaining life | 3 years | estimated life | 4 year |
| salvage value now | $4,000 | salvage value in 4 years | $2,000 |
| salvage value in 3 years | $0 | Annual depreciation for tax purposes | $6,000 |
| written down value now | $7,600 | Cost | $24,000 |
| Annual Depreciation for tax purposes | $2,200 | | |
| Annual net cash flows before tax | $14,000 | annual 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.
