A firm must decide whether to provide their salespeople with firm-owned cars or

Question

A firm must decide whether to provide their salespeople with firm-owned cars or to pay a mileage allowance for their own cars. New cars would cost about $28,000 each and could be resold 4 years later for about $11,000 each. Annual operating costs would be $1200 per year plus $0.24 per mile. If the salespeople drove their own cars, the firm would pay $0.50 per mile. Assume a 10% annual interest rate.

How many miles must each salesperson drive each year for it to be economically practical for the firm to provide the cars?

Explanation / Answer

[(28,000 - 11,000) / 4] + 1,200 = $5,450 fixed cost per year if purchased

Let the number of miles = x

5,450 + 0.24x = 0.50x

0.26x = 5,450

x = 20,962 miles

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