Problem
Consider the case of Super Dupper Uber Company which is considering purchasing a new car to replace an old one.
The old car has a book value of zero but a market value of $15,000
The new car costs $90,000 and is expected to provide savings and increased profits of $20,000 per year for the next 10 years. It has an expected useful life of ten years, after which its estimated salvage value would be $10,000
• Estimating straight-line depreciation, a 34% effective tax rate, and a cost of capital of 12%, should Super Dupper Uber Company replace the current car?
• What would happen if the cost of capital would be higher or lower than 12% and why could this happen?