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In: Finance

You need to choose Company ABC’s company vehicle. You have two options: Mercedes or Acura. Once...

You need to choose Company ABC’s company vehicle. You have two options: Mercedes or Acura.

Once purchased, assume Company ABC keeps purchasing the same type of vehicle as soon as the useful life is over. John Smith (CEO) says both of these vehicles give him the same level of satisfaction and it all depends on the annualized cost of the car.

Mercedes:

Initial Costs = $100,000

Operating Expenses = $15,000 per year

Has a 4 year life, after which it will sell for $15,500

Acura:

Initial Costs = $85,000

Operating Expenses = $17,600 per year

Has a 3 year life, after which it will sell for $10,100

CCA Rate = 42%

Corporate Tax Rate = 43%

Required Rate of Return = 12%

QUESTION: Find the EAC's of these two vehicles? (Take in tax and CCA tax shield into consideration) Which vehicle do you recommend to Alex and why?

PLEASE SHOW CALCULATIONS AND STEP BY STEP WORK!!!

Solutions

Expert Solution

VEHICLE RECOMMENDED: MERCEDES

IT HAS LOWER EAC(Equivalent Annual Cost)

DETAILED CALCULATIONS GIVEN BELOW:

jeff jeffy answered 2 years ago
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