Question

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.

Answer 1

Solution

German Car

Year	Cost	Fuel Usage A	Miles Driven 150000 Spread Evenly -B	No. of Gallons - B/A C	Fuel Cost per gallon D	Fuel Cost C*D	Repair Cost	Insurance Cost	Salvage Value	Total	PVF @5%	Present Value of Cost
0	$45,000.00									$      45,000.00	$      1.0000	$              45,000.00
1		21.00	18750.00	892.86	$                3.00	$         2,678.57	$    1,000.00	$             850.00		$        4,528.57	$      0.9524	$                4,312.93
2		21.00	18750.00	892.86	$                3.06	$         2,732.14	$    1,040.00	$             867.00		$        4,639.14	$      0.9070	$                4,207.84
3		21.00	18750.00	892.86	$                3.12	$         2,786.79	$    1,081.60	$             884.34		$        4,752.73	$      0.8638	$                4,105.58
4		21.00	18750.00	892.86	$                3.18	$         2,842.52	$    1,124.86	$             902.03		$        4,869.41	$      0.8227	$                4,006.08
5		21.00	18750.00	892.86	$                3.25	$         2,899.37	$    1,169.86	$             920.07		$        4,989.30	$      0.7835	$                3,909.25
6		20.79	18750.00	901.88	$                3.31	$         2,987.23	$    1,216.65	$             938.47		$        5,142.35	$      0.7462	$                3,837.30
7		20.58	18750.00	910.99	$                3.38	$         3,077.75	$    1,265.32	$             957.24		$        5,300.31	$      0.7107	$                3,766.83
8		20.38	18750.00	920.19	$                3.45	$         3,171.02	$    1,315.93	$             976.38	$                   -7,000.00	$      -1,536.67	$      0.6768	$               -1,040.08
										Present Value of Cost		$              72,105.73

American Car

Year	Cost	Fuel Usage A	Miles Driven 150000 Spread Evenly -B	No. of Gallons - B/A C	Fuel Cost per gallon D	Fuel Cost C*D	Repair Cost	Insurance Cost	Pride of Owning American Car	Salvage Value	Total	PVF @5%	Present Value of Cost
0	$35,000.00										$35,000.00	$                   1.0000	$ 35,000.00
1		20.00	18750.00	937.50	$                3.00	$         2,812.50	$       800.00	$             800.00	$                       375.00		$   4,787.50	$                   0.9524	$   4,559.52
2		20.00	18750.00	937.50	$                3.06	$         2,868.75	$       832.00	$             817.60	$                       375.00		$   4,893.35	$                   0.9070	$   4,438.41
3		20.00	18750.00	937.50	$                3.12	$         2,926.13	$       865.28	$             835.59	$                       375.00		$   5,001.99	$                   0.8638	$   4,320.91
4		19.40	18750.00	966.49	$                3.18	$         3,076.96	$       899.89	$             853.97	$                       375.00		$   5,205.82	$                   0.8227	$   4,282.84
5		18.82	18750.00	996.39	$                3.25	$         3,235.56	$       935.89	$             872.76	$                       375.00		$   5,419.21	$                   0.7835	$   4,246.09
6		18.25	18750.00	1027.20	$                3.31	$         3,402.34	$       973.32	$             891.96	$                       375.00		$   5,642.62	$                   0.7462	$   4,210.61
7		17.71	18750.00	1058.97	$                3.38	$         3,577.72	$    1,012.26	$             911.58	$                       375.00		$   5,876.56	$                   0.7107	$   4,176.36
8		17.17	18750.00	1091.72	$                3.45	$         3,762.14	$    1,052.75	$             931.64	$                       375.00	$      -5,500.00	$      621.52	$                   0.6768	$      420.67
											Present Value of Cost		$65,655.42

Therefore from the above American Car which costs $65,655.42 which is economically affordable based on present worth analysis.