Question

Learning Objective: 6-5 Make appropriate asset replacement decisions Gibson Freight Company owns a truck that cost $47,000. Currently, the truck's book value is $22,000, and its expected remaining useful life is five years. Gibson has the opportunity to purchase for $30,100 a replacement truck that is extremely fuel efficient. Fuel cost for the old truck is expected to be $6,400 per year more than fuel cost for the new truck. The old truck is paid for but, in spite of being in good condition, can be sold for only $12,000. Required Calculate the total relevant costs. Should Gibson replace the old truck with the new fuel-efficient model, or should it continue to use the old truck until it wears out?

Answer 1

To calculate the total relevant costs, we need to consider the cost of the new truck, the fuel cost for both the old and new trucks, and the salvage value of the old truck.

Step-by-step explanation:

To calculate the total relevant costs, we need to consider the cost of the new truck, the fuel cost for both the old and new trucks, and the salvage value of the old truck. Let's break it down:

• The cost of the new truck is $30,100.
• The fuel cost for the old truck is $6,400 per year more than the fuel cost for the new truck.
• The salvage value of the old truck is $12,000.

Therefore, the total relevant costs can be calculated as follows:

Total relevant costs = Cost of new truck + Fuel cost for old truck - Fuel cost for new truck + Salvage value of old truck