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Hello,
can you please help with 37.1. question from the practice and revision kit?
PD Co is deciding whether to replace its delivery vans every year or every other year. The initial cost of a van is $20,000. Maintenance costs would be nil in the first year, and $5,000 at the end of the second year. Second-hand value would fall from $10,000 to $8,000 if it held on to the van for two years instead of just one. PD Co’s cost of capital is 10%. How often should PD Co replace their vans, and what is the annual equivalent cost (‘EAC’) of that option?
I do not understand why in net present value of costs of 1 year cycle calculation, NPV of maintenance cost of 5,000 are deducted from the purchase price of 20,000. I would add those 20,000 to the calculation as it is also cost.
Thank you!
I only have the BPP Revision Kit, and question 37.1 in the current edition is not related to replacement.
The maintenance costs certainly should be added. However are you sure that this is the case – with 1 year replacement they should add the maintenance costs of 5,000 but should also subtract the sale proceeds of 10,000. It could be that the answer has just subtracted the net amount of 5,000.
Have you watched my free lectures on replacement? The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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