Question

Asset Replacement Decision

Roadrunner Freight Company owns a truck that cost $42,000.Currently, the truck’s book value is $24,000 and its expected remaining useful life is four years.Roadrunner has the opportunity to purchase for $31,200 a replacement truck that is extremely fuel efficient.Fuel cost for the old truck is expected to be $6,000 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 $14,400.

Should Roadrunner replace the old truck with the new fuel-efficient model, or should it continue to use the old truck until it wears out?Include your calculations with your answer.

Answer 1

The decision on whether to replace the old truck with the new fuel-efficient model, or should it continue to use the old truck is as shown below:

Differential Analysis
Continue Old Truck or Replace
	Continue Old Truck	Replace with new truck	Differential Effect on Income
Revenues:
Proceeds from sale of Old Truck		14,400	14,400
Costs:
Purchase Price	0	31,200	31,200
Excess of Fuel cost	24,000		-24,000
Income (Loss)	-24,000	-16,800	7,200

Roadrunner Freight Company should replace the old truck as replacing the truck will save cost of $7,200