In: Accounting
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 your workings.
;The Present value formula is :
It States the Present value for the future outcomes at given number of years. The calculation as per the Question is herein below:
As per the Above Japanese car is preffered.