Jerry Field was hired by Larson Wholesalers at the end of 2019 to fill an executive position in the company. He is scheduled to begin work on January 2, 2020. Larson Wholesalers plans to transfer him to their Hong Kong office after two years.
As part of his compensation package, Jerry has considered having the Company provide him with a car for his personal use. He does not require the vehicle for his employment duties and, as a consequence, it will be used for personal activities only.
Jerry anticipates that he will drive the car about 80,000 kilometers in both 2020 and 2021. He is considering two different cars and has collected the following information on them: The Company has agreed to provide an additional $100,000 in compensation and they offer Jerry the following alternatives.
Option 1 - They will purchase either car and allow Jerry to use it for the calendar years 2020 and 2021. If Jerry prefers the Lexus ES, the Company will provide a signing bonus of $55,000, the difference in the cost of the two cars. The bonus will be paid when the car is delivered on January 2, 2020.
Option 2 - They will provide Jerry with an $100,000 signing bonus. This bonus will be paid on January 2, 2020. He will use the funds to purchase one of the cars personally.
If the Company buys either car, Jerry will pay his own operating costs and the Company will take possession of the car after the 2 years.
Jerry's combined federal/provincial marginal tax rate is expected to be 48 percent in both 2020 and 2021.
Assume that the prescribed operating cost benefit will be $0.28 per kilometer for both 2020 and 2021.
Required: Advise Jerry as to which option he should choose if decides that he wants:
A. the Lexus ES.
B. the Lexus LS.
In both parts of this question your advice should be based on non-discounted cash outflows. Ignore GST and HST considerations in your solution.

Question

Jerry Field was hired by Larson Wholesalers at the end of 2019 to fill an executive position in the company. He is scheduled to begin work on January 2, 2020. Larson Wholesalers plans to transfer him to their Hong Kong office after two years.
As part of his compensation package, Jerry has considered having the Company provide him with a car for his personal use. He does not require the vehicle for his employment duties and, as a consequence, it will be used for personal activities only.
Jerry anticipates that he will drive the car about 80,000 kilometers in both 2020 and 2021. He is considering two different cars and has collected the following information on them:  The Company has agreed to provide an additional $100,000 in compensation and they offer Jerry the following alternatives.
Option 1 - They will purchase either car and allow Jerry to use it for the calendar years 2020 and 2021. If Jerry prefers the Lexus ES, the Company will provide a signing bonus of $55,000, the difference in the cost of the two cars. The bonus will be paid when the car is delivered on January 2, 2020.
Option 2 - They will provide Jerry with an $100,000 signing bonus. This bonus will be paid on January 2, 2020. He will use the funds to purchase one of the cars personally.
If the Company buys either car, Jerry will pay his own operating costs and the Company will take possession of the car after the 2 years.
Jerry's combined federal/provincial marginal tax rate is expected to be 48 percent in both 2020 and 2021.
Assume that the prescribed operating cost benefit will be $0.28 per kilometer for both 2020 and 2021.
Required: Advise Jerry as to which option he should choose if decides that he wants:
A. the Lexus ES.
B. the Lexus LS.
In both parts of this question your advice should be based on non-discounted cash outflows. Ignore GST and HST considerations in your solution.

Quizplus · Accepted Answer

The Answer of Jerry Field was hired by Larson Wholesalers at the end of 2019 to fill an executive position in the company. He is scheduled to begin work on January 2, 2020. Larson Wholesalers plans to transfer him to their Hong Kong office after two years.
As part of his compensation package, Jerry has considered having the Company provide him with a car for his personal use. He does not require the vehicle for his employment duties and, as a consequence, it will be used for personal activities only.
Jerry anticipates that he will drive the car about 80,000 kilometers in both 2020 and 2021. He is considering two different cars and has collected the following information on them:  The Company has agreed to provide an additional $100,000 in compensation and they offer Jerry the following alternatives.
Option 1 - They will purchase either car and allow Jerry to use it for the calendar years 2020 and 2021. If Jerry prefers the Lexus ES, the Company will provide a signing bonus of $55,000, the difference in the cost of the two cars. The bonus will be paid when the car is delivered on January 2, 2020.
Option 2 - They will provide Jerry with an $100,000 signing bonus. This bonus will be paid on January 2, 2020. He will use the funds to purchase one of the cars personally.
If the Company buys either car, Jerry will pay his own operating costs and the Company will take possession of the car after the 2 years.
Jerry's combined federal/provincial marginal tax rate is expected to be 48 percent in both 2020 and 2021.
Assume that the prescribed operating cost benefit will be $0.28 per kilometer for both 2020 and 2021.
Required: Advise Jerry as to which option he should choose if decides that he wants:
A. the Lexus ES.
B. the Lexus LS.
In both parts of this question your advice should be based on non-discounted cash outflows. Ignore GST and HST considerations in your solution.

Jerry Field Was Hired by Larson Wholesalers at the End