Make an investment decision about whether a $60,000 automobile should be purchased or not. Assume the automobile to be purchased
will have a six-year productive life and no salvage value. It will produce income of $15,000 for the first three years before deductions for depreciation and taxes.
In the last three years, the income before depreciation and taxes will be $14,000, $13,000, and $12,000, respectively. Furthermore, assume a tax rate of 35% and a cost of capital of 10% for the analysis.
a) What is the cash flow generated each year?
b) Why is this automobile depreciated in 6 years?
c) Using the present value factor table below, what is the net present value?
d) should the automobile purchase be recommended based on the financial analysis?
| Year |
Present value factor (10%) |
| 1 |
0.909 |
| 2 |
0.826 |
| 3 |
0.751 |
| 4 |
0.683 |
| 5 |
0.621 |
| 6 |
0.564 |