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Due to rising fuel prices, Eastern Community Hospital wants to replace its existing fleet of ambulances with a more fuel-efficient fleet. The existing fleet was purchased three years ago for $150,000 and is being depreciated on a straight-line basis over an eight-year life to zero salvage value. Though the current book value for the existing fleet is $93,750, this fleet could only be sold for $80,000 today. The new fleet would cost $250,000 and would be depreciated on a straight-line basis over a five-year life to a zero salvage value. The new fleet would reduce fuel costs by $80,000 per year for five years and would not affect the level of net working capital. The economic life of the new fleet is five years and the required rate of return on the project is 5 percent.

a. Should the existing fleet of ambulances be replaced? Use the incremental NPV approach to evaluate the decision under a non-profit assumption.

b. If the facility were a taxpaying entity with a tax rate of 40 percent, should the existing fleet be replaced? Use the incremental NPV approach to evaluate the decision. (Hint: see Appendix F.)