A company is currently paying its employees $0.56 per mile to drive their own cars on company business. The company is considering supplying employees with cars, which would involve purchasing at $25,000 with an estimated three-year life, a net salvage value of $8,000, taxes and insurance at a cost of $1,200 per year, and operating and maintenance expenses of $0.30 per mile. If the interest rate is 10% and the company anticipates an employee’s annual travel to be 30,000 miles, what is the equivalent cost per mile (neglecting income taxes)?

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jepessoa jepessoa · Answer 1 · 2020-10-28T16:23:28+01:00

Answer:

$0.5945 per mile

Explanation:

initial outlay = $25,000

salvage value = $8,000

insurance costs = $1,200

operating costs = $0.30 per mile x 30,000 miles = $9,000

the net cash flows per year:

NCF0 = -$25,000

NCF1 = -$10,200

NCF2 = -$10,200

NCF3 = -$2,200

the present value = -$44,355.37

equivalent annual cost = $44,355.37 / 2.4869 (PV annuity factor, 10%, 3 periods)] = $17,835.61

equivalent cost per mile = $17,835.61 / 30,000 miles = $0.5945 per mile