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Solution:

Initial investment = $60,000

Life of automobile = 6 years

Salvage value = 0

Hence, depreciation per year = $60,000/6 = $10,000

Cash flow table:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6


Initial 60,000
Investment
Income before 15,000 15,000 15,000 14,000 13,000 12,000
depreciation
and tax
Less: 10,000 10,000 10,000 10,000 10,000 10,000
Depreciation
Income after 5,000 5,000 5,000 4,000 3,000 2,000
depreciation but
before tax
Less: Tax @ 1,750 1,750 1,750 1,400 1,050 700
35%
3,250 3,250 3,250 2,600 1,950 1,300

Income after tax


Add: 10,000 10,000 10,000 10,000 10,000 10,000
Depreciation
13,250 13,250 13,250 12,600 10,950 11,300
Cash flow
PV factor @ 0.909 0.856 0.751 0.683 0.621 0.564
10%
12,044.25 11,342 9,950.75 8,605.80 6,799.95 6,373.20
PV of cash flow
Sum of PV of 55,115.95
cash flow

NPV 4,884.05

Since NPV is positive, therefore automobile should be purchased.