1. Consider a $50,000 SUV that you expect to last for 10 years. The IRS uses an MACRS 5-year depreciation schedule on cars. It allows depreciating 20% in year 1, 32%, 19.2%, 11.52%, 11.52%, and 5.76% in the following years. You can finance this car yourself. You can produce sales of $100,000 per year with it. Maintenance costs will be $5,000 per year. Your income tax rate is 30% per annum. Your cost of capital is 12% per annum,
2, Repeat the previous question but assume you finance the entire car with a loan that charges 10% interest per annum. (The net present value now is the bundle “loan plus car,” of course.)