Reference no: EM133011796
Question - You own a small business as a gardener. Your car is getting rather old, and you are considering replacing it. To keep your current car, you believe that you will have to spend:
$500 immediately to repair a problem with the engine,
$100 per year in additional maintenance (above the usual amount for other cars),
This car will last you 4 more years.
The book value of this car is $4,000, and you believe you can sell it for $2,000 today if you wanted to do so.
Alternatively, you may buy a new car for $20,000. You know the following:
This new car comes with free servicing for the next 4 years, which you estimate to be worth $400 per year,
Because the new car will be more reliable, you believe you will be able to generate an additional $1,000 revenue each year in business,
You plan on retiring after 4 years, at which point the car will be considered worthless to you.
You are required by law to use straight line depreciation for your car, the tax rate for your business is 15%, and you currently have a business loan charging interest at 6% p.a. (take this as your rate of return).
Required - Calculate the NPV of buying the new car.
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