Reference no: EM132596241

You are an entrepreneur who delivers pizza for some of the large chains in Orleans and charge them on a per pizza basis. To make deliveries, you are using a 2013 Toyota Yaris. The Toyota Yaris costs $2,000 per year in gas and $2,400 per year in repairs. You expect that you could keep the Toyota Yaris running for another 5 years, when you will have to sell it for scrap. You estimate that you will be able to get $500 for it at that time.

You are thinking about buying a new car to replace the Toyota Yaris. You are considering buying a new 2019 Honda Civic. The Honda Civic will cost $20,000 and there would be a $700 delivery charge. The Civic will cost $1,200 per year in gas and only $300 per year in maintenance costs (it is under warranty). Also, because the car is faster, you will be able to deliver more pizzas and you expect revenues to increase by $900 per year. If you buy the new car, you will sell the Toyota Yaris and you expect to get $5,000 for it now. The Civic would be sold in 5 years for $10,000. The new Honda Civic would be financed through the dealership at an interest rate of 10% per year, compounded quarterly. Given that your tax rate is 34%, that your cars depreciate for tax purposes at a CCA rate of 20% per year and that the asset class for these cars will always remain open (you have other cars in the asset class). If you require a 12% return on any money you invest in your business, should you replace your car? Note that the rate you require is the same as the discount rate.