Joe Carolina is considering the purchase of a new car. His current vehicle is a 9 year old Mercedes which has a resale value of \(\$ 3,500\) and has a remaining life of approximately 3 years. Joe has looked at a luxurious \(20 \times 2\) Newmobile which sells for \(\$ 10,000\) and will have a salvage value of \(\$ 2,000\) at the end of 3 years. Joe expects to drive 12,000 miles a year over this period. His Mercedes gets 12 miles per gallon of premium gas, which sells for \(\$ 1.50\) per gallon. Although in reasonable condition, the Mercedes is expected to incur \(\$ 500\) in maintenance costs next year, and this will increase by \(10 \%\) in each of the following years. The Newmobile will get 24 miles per gallon of unleaded gasoline, that sells for \(\$ 1.30\) per gallon, and will be maintenance free.

Required:

(a) Assume Joe is a wealthy college student. His car will represent a personal expense with no income tax impact. Based on quantitative considerations and ignoring the time value of money, should Joe purchase the Newmobile?

(b) Assume Joe is a salesman with an effective income tax rate of \(30 \%\). His car is used exclusively for business purposes; thus, it must be capitalized and related expenses are tax deductible. The Mercedes is fully depreciated and has no book value for tax purposes. Ignoring the time value of money, should Joe purchase the Newmobile?

(c) What qualitative considerations might affect Joe's decision?