taxi’s operating cost for each of 3 years and salvage value at the end of year is as follows:
| Year 1 | Year 2 | Year 3 | |
| Operating Cost | ₹ 1,80,000 | ₹ 2,10,000 | ₹ 2,38,000 |
| Resale Value | ₹ 2,80,000 | ₹ 2,30,000 | ₹ 1,68,000 |
You are required to determine the optimal replacement period of taxi if cost of capital of X Ltd. is 10%.
Solution
NPV if taxi is kept for 1 Year
= – ₹ 4,00,000 – ₹ 1,80,000 (0.909) + ₹ 2,80,000 (0.909)
= – ₹ 3,09,100
NPV if taxi is kept for 2 Year
= – ₹ 4,00,000 – ₹ 1,80,000 x 0.909 + ₹ 20,000 x 0.826
= – ₹ 5,47,100
NPV if taxi is kept for 3 Year
= – ₹ 4,00,000 – ₹ 1,80,000 x 0.909 – ₹ 2,10,000 x 0.826 – ₹ 70,000 x 0.751
= – ₹ 7,89,650
Since lowest EAC incur if taxi for 2 year; Hence the optimum replacement cycle to replace taxi in 2 years.