Charles is deeply in debt, with over $60,000 owed on credit cards at an annual rate of 20%, and $80,000 owed on student loans at an annual interest rate of 5%. To maintain appearances, he must arrive at work in style. His only options are:
1) To continue to drive his fancy Mercedes Benz to work, or
2) To sell his MB and hire the lightning limousine service to chauffeur him to work. (Assume Charles gets the same value from either alternative, and never has any reason to use his car other than to go to work). Lightning Limousine charges $18,000 per year (with payment for the full year due at the end of the year). Charles' MB can be sold now for $50,000 whereas a year from now its resale price will only be $40,000
Should Charles sell his car and employ Lightning Limousine, or not? Why?
What is the user cost of capital associates with owning the MB for the next year?