P6–12 Valuation fundamentals Imagine that you are trying to evaluate the economics of purchasing an automobile. You expect the car to provide annual after-tax cash benefits of

$1,200 at the end of each year and assume that you can sell the car for after-tax proceeds of $5,000 at the end of the planned 5-year ownership period. All funds for purchasing the car will be drawn from your savings, which are currently earning 6% after taxes.

a. Identify the cash flows, their timing, and the required return applicable to valuing the car.

b. What is the maximum price you would be willing to pay to acquire the car? Explain.