The Colgate Distributing Company has the choice of furnishing its sales representatives with a car or paying
Question:
Cost of car: $15,000
Estimated life: 4 years
Depreciation method: Straight-line over 4 years (assuming no salvage value)
Expected sales value oj car at end of 4 years: $2, 500
Estimated annual operating costs:
Gasoline..........................$900
License and insurance...........600
Garage.............................300
Maintenance
Near 1.............................230
Year 2.............................350
Year 3.............................450
Year 4.............................600
If the sales representatives use their own cars, the company will reimburse diem at 35 cents per mile; the company estimates that each representative will drive 18,000 miles per year for business purposes. The company's cost of capital is 10 percent, and its income tax rate is 40 percent.
Should the company buy cars for its sales representatives or pay them a mileage allowance? Use the NPV method in your calculation.
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
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Related Book For
Managerial Economics
ISBN: 978-0133020267
7th edition
Authors: Paul Keat, Philip K Young, Steve Erfle
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