Question

A truck was purchased 3 years ago for $50,000 and can be sold today for $25,000. The operating costs are $9,000 per year, and it is expected to last 4 more years with a $5,000 salvage value. A new truck, which will perform that same service, can be purchased for $55,000, and it will have a life of 10 years with operating costs of $28,000 per year and a $10,000 salvage value. What is the value that should be used as P for the presently owned vehicle in a replacement study

Answer 1

P = $25,000

Step-by-step explanation:

Cost price of truck = $50,000

Present value = $25,000

Operating costs = $9,000 per year

Salvage value = $4,000

Find remaining amount for old truck:

Amount remaining = $50,000 - $25,000 = $25,000

Total amount, since it has a salvage value of $5,000:

Total = $25,00 + $5,000 = $30,000

For new truck:

Cost price = $55,000

Operating costs = $28,000 per year

Salvage value = $10,000

To find the value that should be used as P for the presently owned vehicle in a replacement study:

P = Cost of new truck - Total amount remaining from old truck

P = $55,000 - $30,000

P = $25,000

Therefore, the value that should be used as P for the presently owned vehicle in a replacement study is $25,000