Question

Exercise 6-17A Asset replacement-opportunity cost LO 6-5 Walton Freight Company owns a truck that cost $32,000. Currently, the truck's book value is $26,000, and its expected remaining useful life is four years. Walton has the opportunity to purchase for $28,000 a replacement truck that is extremely fuel efficient. Fuel cost for the old truck is expected to be $5,500 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 $14,000. Required Calculate the total relevant costs. Should Walton replace the old truck with the new fuel-efficient model, or should it continue to use the old truck until it wears out? Keep Old Replace With New Total relevant costs Should Walton replace or continue the old truck?

Answer 1

	Keep old	Replace with new
Total relevant costs	$       36,000	$                    28,000
Should walton replace or continue the old truck?		Replace with new
Workings:	Keep old	Replace with new
Purchase price		$                    28,000
Opportunity cost (Sale Price of old truck)	$       14,000
Incremental Operating Expenses (Fuel) ($5500 X 4 years)	$       22,000
Total relevant costs	$       36,000	$                    28,000