Explain salvage value and useful life

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Reference no: EM1316786

Explain Salvage Value and Useful Life

A newly graduated engineer has accepted a lucrative job. He will travel frequently in the new position and has decided to obtain a new vehicle. He would like to have a vehicle that will last 10 years before replacement is necessary. After much research, he has settled on three options:

1. Purchase a vehicle for $19,999 in cash now.

2. Purchase a vehicle now by paying $0 down and making payments of $6,500 for sixty (60) months.

3. Lease a vehicle now for a down payment of $1,000 and monthly payments of $299.00 for sixty (60) months. The leased vehicle will be worth $6,500 at the end of the five (5) year period, at which time the engineer will purchase the car for $6,500.
In all three cases, the vehicle can be sold at the end of 10 years for $2,000.

Develop a choice table for 0% to 50% interest. Assume that i = 9% and use an incremental rate of return analysis to determine which option the engineer should select.

Reference no: EM1316786

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