A sales engineer has the following alternatives to consider in touring his sales

Question

A sales engineer has the following alternatives to consider in touring his sales territory.
(a) Buy a new car for $14,500. Salvage value is expected to be about $5000 after 3 years. Maintenance and insurance cost is $1000 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 12% 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 30% incremental tax bracket. Use MACRS depreciation.

Explanation / Answer

2%

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