Question

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 $40,000 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 $6000. Insurance cost will be $700 for the first year, increasing by 3% 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 3% 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 $750 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% per year. The car can be sold for $5500 at the end of year 8.

If the graduate anticipates driving 160000 miles by the end of year 8 and the average interest rate is expected to remain at 8% per year, which car is economically affordable based on present worth analysis? Assume fuel cost will be $4 per gallon in year 1 and increase by an average of 3% per year. Show all your workings.

Answer 1