Suppose that Chatham Automotive (Problem 7.26) can get a $14 000 trade-in value for their current electric model when they purchase a new propane model. $hould they replace the electric forklifts now?
Problem 7.26:
Chatham Automotive purchased new electric forklifts to move steel automobile parts two years ago. These cost $75 000 each, including the charging stand. In practice, it was found that they did not hold a charge as long as claimed by the manufacturer, so operating costs are very high. This also results in their currently having a salvage value of about $10 000.
Chatham is considering replacing them with propane models. The new ones cost $58 000. After one year, they have a salvage value of $40 000, and thereafter decline in value at a declining-balance depreciation rate of 20%, as does the electric model from this time on. The ALARR is 8%. Operating costs for the electric model are S20 000 over the first year, rising by 12% per year. Operating costs for the propane model initially will be $10 000 over the first year, rising by 12% per year. Should Chatham Automotive replace the forklifts now?