Today, it is 2025 and Uber is planning on purchasing 500 self-driving cars for the San Francisco market.

Today, it is 2025 and Uber is planning on purchasing 500 self-driving cars for the San Francisco market. They have their choice of two models, a Tesla and a GM. Each Tesla costs $75,000 and has maintenance expenses of $5,000 a year because of the heavy use they receive. The GM only costs $60,000, but has maintenance expenses of $6,000 per year. The Tesla is expected to have a productive life of 5 years, after which it will have a salvage value of zero. (The battery disposal is very expensive) The GM is expected to have a productive life of 3 years with zero value afterwards. Each car will be depreciated straight-line over its productive life to a zero salvage value. Uber's marginal tax rate is 40% and the appropriate discount rate is 13%. Which car should they choose? Show your work to receive any partial credit.

Expert Solution

Calculation of Equated annual cost per year :

	Telsa	GM
Initial cost	75000	60000
Depreciation per year [cost /useful life]	75000/5 = 15000	60000/3=20000
Annual cost	5000+15000= -20000 [since it is cost (cash outflow)]	6000+20000=-26000
After tax annual cost [annual cost (1-tax)]	-20000[1-.40] = -12000	-26000[1-.40]= -15600
Annual cash flow [after tax cost+ depreciation]	-12000+15000 =3000	-15600+20000= 4400

present value of cash inflow	PVA 13%,5 *Annual cash inflow	PVA 13%,3 *Annual cash flow
	3.51723*3000	2.36115*4400
	10551.69	10389.06

Net cost of cAr [initial cost - present value of cash inflow]	75000-10551.69 64448.31	60000-10389.06 49610.94
equated annual cost [net cost /PVA@ 13%,n]	64448.31/3.51723 18323.60	49610.94/2.36115 21011.35

since the equated cost of TElSA is lower than GM ,Telsa should be purchased.

***Calculation is done for one car ,all cost should be multiplied by 500 to get amount for 500 cars .

jeff jeffy answered 2 years ago

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