Thomas runs a construction business. Thomas operates his business as a sole proprietorship and expects to be in a 35% marginal tax rate for all years pertinent to this decision.

Thomas intends to purchase a new SUV at the beginning of 2021 for use in his construction business (100% business use) that he will use for 6 years and then give the vehicle to his son for college. He is considering the following two vehicles:

1. Mercedes-Benz AMG GLS 63: purchase price = $135,000.
2. Mercedes-Benz AMG G 63: purchase price = $160,000.

The AMG GLS 63 gross vehicle weight is approximately 5,900 pounds. The AMG G 63 weighs in at a hefty 6,600.

Because the AMG G 63 is a larger and more expensive vehicle, annual operating costs are estimated to be about $1,500 more per year than the AMG GLS 63. (For simplicity, assume these costs are incurred at year-end.)

REQUIRED: Perform a discounted cash-flow analysis of the two SUVs to determine if Thomas would minimize his after-tax costs by acquiring the AMG GLS 63 or the AMG G 63. You should take into account any elections that provide optimal income tax outcome.

In making your calculations, assume the following:

• Thomas will pay cash at the beginning of 2021 for either vehicle he purchases;
• 35% marginal tax rate for all years (assume all at year-end);

• 6% discount rate to compute the present value of future cash flows;
• depreciation rates for as follows:

2021Luxury Limits Normal MACRS Rates

yr 1 $18,200 20.0%

yr 2 16,400 32.0%

yr 3 9,800 19.2%

yr 4 5,860 11.52%

yr 5 5,860 11.52%

yr 6 5,860 5.76%

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