Adapted from a problem by S. Zeff William Marsh, CEO of Gulf coast manufacturing, wishes to know which of two strategies he has chosen for acquiring an automobile has lower present value of cost.

Strategy L. Acquire a new Lexus at the beginning of 2008, keep ii until the end of 2013, then trade it in on a new car.

Strategy M. Acquire a new Mercedes-Benz at the beginning of 2008, trade it in at the end of 2010 on a second Mercedes-Benz, keep that for another three years, then trade it in on a new car at the end of 2013. Data pertinent to these choices appear below. Assume that Marsh will receive the trade-in value in cash or as a credit toward the purchase price of a new car. Ignore income taxes and use a discount rate of 10% per year Gulf Coast Manufacturing depreciates automobiles on a straight-line basis over 8 years for financial reporting, assuming zero salvage value at the end of 8 years.

a. Which strategy has lower present value of costs?

b. What role, if any, do depreciation charges play in the analysis and why?

1At this time Lexus is 6 years old; second Mercedes-Benz is 3 years old.
Required
Using future value and present value techniques, including perpetuities to solve a variety of realistic problems, we give no hints as to the specific calculation with theproblems.

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Lexus Mercedes-Benz $ 45,000 Initial Cost at the Start of 2008 S60,000 Initial Cost at the Start of 2011 48,000 Trade-in Value End of 2010 23,000 End of 2013.. Estimated Annual Cash Operating Costs 24,500 16,000 Except Major Servicing .... Estimated Cash Cost of Major Servicing. End of 2011 ...... 4,500 4,000 6,500 End of 2009 and End of 2012. 2,500