Question
Arnold Inc. is considering the purchase of a new truck. It can choose between two brands. Brand A: buying the new truck for $120,000. This
Arnold Inc. is considering the purchase of a new truck. It can choose between two brands.
Brand A: buying the new truck for $120,000. This brand-A truck lasts for 7 years and save the
company $50,000 a year in expenses (before tax).
Brand B: buying the new truck for $80,000. This brand-B truck lasts for 5 years and save the
company $40,000 a year in expenses (before tax).
The opportunity cost of capital is 12% and the firms tax rate is 35%. Assume that the company
will replace the truck at the end of its life. The company uses straight-line depreciation. Which
brand should the company choose for the new truck?
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