Make an investment decision about whether a $60,000 automobile should be purchased or not.

Assume the automobile to be purchased will have a six-year productive life and no salvage
value. It will produce income of $15,000 for the first three years before deductions for
depreciation and taxes. In the last three years, the income before depreciation and taxes will be
$14,000, $13,000, and $12,000, respectively. Furthermore, assume a tax rate of 35% and a cost
of capital of 10% for the analysis. Hint: Use the method described in the lecture.
a) What is the cash flow generated each year?
b) Why is this automobile depreciated in 6 years?
c) Using the present value factor table below, what is the net present value?
d) should the automobile purchase be recommended based on the financial analysis?

Year

Present value factor (10%)

1
2
3
4
5
6

0.909
0.856
0.751
0.683
0.621
0.564