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A sales engineer has the following alternatives to consider in touring his sales territory A. Buy a 2-year old used car for $14,500. Salvage value is expected to be about $5000 after 3 more Maintenance and insurance cost is $1000 years in the first year and increases at the rate of $500/year in subsequent years. Daily operating expenses are $50/day. B. Rent a similar car for $80/day Based on a l2% after-tax rate of return, how many days per year must he use the car to justify its purchase? You may assume that this sales engineer is in the 28% incremental tax bracket. Use MACRS depreciation.

Sagot :

The car must be used for at least 209 days per year to justify its purchase. To answer this question, we must first calculate the annual expenses associated with the purchase of the car.

This includes the cost of the car, the salvage value, the maintenance and insurance costs, and the daily operating expenses.

The cost of the car is $14,500. The salvage value is expected to be $5,000 after 3 years. Maintenance and insurance costs are $1000 in the first year and go up by $500/year in subsequent years. Daily operating expenses are $50/day.

We can then use the MACRS depreciation schedule to determine the annual depreciation expense for the car. Using the 28% incremental tax bracket, the annual depreciation expense for the car is $4,872.

To calculate the total annual expenses associated with the purchase of the car, we must add the cost of the car, the salvage value, the maintenance and insurance costs, and the daily operating expenses. This comes to a total of $19,372.

Now, we can calculate the number of days per year the sales engineer must use the car to justify its purchase. To do this, we must divide the total annual expense ($19,372) by the daily rental cost ($80).

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