A company is currently paying a sales representative $0.60 per mile to drive her car for company business. The company is considering supplying the representative with a car, which would involve the following: A car costs $25,000, has a service life of 5 years, and a market value of $5,000 at the end of that time. Monthly storage costs for the car are $200, and the cost of fuel, tires, and maintenance is 20 cents per mile. The car will be depreciated by MACRS, using a recovery period of 5 years (20%, 32%, 19.20%, 11.52%, and 11.52%). The firms marginal tax rate is 40%.

Suppose that the required travel by the sales person would be 30,000 miles per year. Which option would be better at i = 15%?

What annual mileage must a salesman travel by car for the cost of the two methods of providing transportation to be equal if the interest rate is 15%?

(a) Determine the annual net cash flows from the project.

(b) Perform a sensitivity analysis on the projects data, varying savings in telephone bills and savings in deadhead miles. Assume that each of these variables can deviate from its base-case expected value by 10%, 20%, and 30%.

(c) Prepare sensitivity diagrams and interpret the results.