Tension Free Solutions (TFS) is a reputed is logistic service providers. All the deliveries are made by drivers of the mini trucks. The company…

Tension Free Solutions (TFS) is a reputed is logistic service providers. All the deliveries are made by drivers of the mini trucks. The company employs many drivers, each of whom is provided with small trucks to make deliveries. Each driver drives approximately 40000 kms per annuam. TFS decides to continue its present policy of always buying a new truck for its drivers but wonders whether the present policy of replacing the truck every three year is optimal or not. It is of believe that as new models are entering into market on yearly basis, it wishes to consider whether a replacement of either one year or two years would be better option than present three year period. The fleet of truck is due for replacement shortly in near future. The purchase price of latest model truck is 5,50,000. Resale value of used truck at current prices in market is as follows: Period ₹ 1 Year old 3,50,000 2 Year old 2,10,000 3 Year old 90,000 Running and Maintenance expenses (excluding depreciation) are as follows: Year Road Taxes Insurance etc. (₹) Petrol Repair Maintenance etc. (₹) 1 30,000 3,00,000 2 30,000 3,50,000 3 30,000 4,30,000 Using opportunity cost of capital as 10% you are required to determine optimal replacement period of truck.