Pronto Corp. wants to decide whether to overhaul an existing
truck or buy a new one.
The old truck was purchased two and a half years ago for $30,000
and is being depreciated using the straight-line method using the
half-year convention (five year class for tax purposes). The cash
operating costs of the old truck total $18,000 per year. To enable
the truck to last four more years, an overhaul costing $7,000 is
needed. Assume that the overhaul will be expensed for tax purposes.
If the truck is overhauled, it is estimated to have a salvage value
The new truck would cost $45,000 and is expected to have annual
operating costs of $8,000. If the new truck is purchased it is
expected to be disposed of at the beginning of its fifth year for
$15,000. Assuming the new truck is purchased, the old truck can
probably be sold “as is” for $5,000. MACRS depreciation with a
five-year life will be used for the new truck. The cost of capital
is 10% and the tax rate is 40%.