A new American graduate is contemplating buying a Japanese,
German, or an American car. No matter the type of car, he plans to
buy a new one at the end of 8 years.
Japanese car will cost $30,000 and have a fuel usage of 23
Miles Per gallon (mpg) for the first 2 years, and will decrease by
3% per year thereafter. Repair cost will start at $700 per year,
and increase by 3% per year. At the end of year 8, the car can be
sold for $5000. Insurance cost will be $700 for the first year,
increasing by 2% per year thereafter.
A German car will cost $45,000 and have fuel usage of 21mpg
for the first 5 years, and decrease by 1% thereafter to year 8.
Repair cost will start at $1000 in year 1 and increase by 4% per
year. It will have a salvage value of $7000 at the end of year 8.
Insurance cost will be $850 the first year, increasing by 2% per
year thereafter.
The American car will cost $35,000 and have fuel usage of
20mpg for the first 3 years, and will decrease by 3% per year
thereafter. Repair cost will be $800 in year 1, increasing by 4%
per year thereafter. Being an American, the graduate will price the
pride of owning an American car at $0.4 for every 20 miles driven,
increasing by 2% per year. Insurance cost will be $800 per year
increasing by 2.2% per year. The car can be sold for $5500 at the
end of year 8.
If the graduate anticipates driving 150000 miles by the end of
year 8 and the average interest rate is expected to remain at 5%
per year, which car is economically affordable based on present
worth analysis? Assume fuel cost will be $3 per gallon in year 1
and increase by an average of 2% per year. Show all workings