Consider the case of Driving Student Company, working hard during the foreign student full time work allowance period.

Driving Student, owned by UCW alumni, is considering purchasing a new, bigger, car (bus) to replace existing car that has a book value of zero, but market value of $15,000

The bus costs $90,000 and is expected to provide savings and increased profits of $20,000 per year for the next ten years.

The new bus has an expected useful life of ten years, after which the estimated salvage value would be $10,000.

Assuming straight line depreciation, a 34% effective tax rate, and a cost of capital (i.e. discount rate) of 12%, should Driving Student replace the existing car?

* Detail Step by step solution.

*Also comments on Discount rate (12%) as per present scenario.