Question

Option 1 - A company is currently paying its employees $0.38 per kilometre to drive their own cars on company business. Option 2 - The company is considering supplying employees with cars, which would involve purchasing at $26360, with an estimated three year life, a net salvage value of $8839, taxes and insurance at a cost of $878 per year, and operating and maintenance expenses of $0.22 per kilometre. If the interest rate is 10.70% and the company anticipates an employee's annual travel to be 22,000 kilometres, answer the following questions: The equivalent cost per km for Option 2 is $ The equivalent cost per km for Option 1 is $ The cheaper option for the company is

Answer 1

The equivalent cost per KM for option 2 is $ 0.65

Calculation

S.No. 1 2 3 4 5 6 Particulars Annual Travel (Kms) Cost of Car ($) Net Salvage Value ($) Useful life (years) Depreciation Per Annum ($) Depreciation Per KM ($) Interest cost per annum ($) Interest cost per KM ($) Taxes and insurance per annum ($) Taxes and insurance per KM ($) O&M expenses per KM ($) Total Cost per KM ($) Values Formula 22,000.00 Given 26,360.00 Given 8,839.00 Given 3.00 Given 5,840.33 (2-3)/4 0.27 5/1 2,820.52 2*10.7% 0.13 7/1 878.00 Given 0.04 9/1 0.22 Given 0.65 6+8+10+11 7 8 9 10 11 12

The equivalent cost per KM for option 1 is $ 0.38 (given)

The Cheaper option for the company is Option 1.

Notes:

• Straight line method depreciation is followed.
• O & M stands for Operation and Maintenance.
• Numbers in formula column represent respective Serial No.
• Assumed the company has used borrowings only for purchasing the car.
• Interest rate is 10.70 % (given).