Question

Assume you need to buy a new vehicle. The junker that you paid $6,000 for three years ago has a current value of $1,500. You have narrowed the choice down to a used 2016 Jeep Cherokee with a blue book value of $8,500 and a new Hyundai Elantra with a sticker price of $20,380. You plan to drive either vehicle for at least five more years.

REQUIRED:

1. Based on the following steps in the decision-making process, briefly describe the key factors you would consider at each step.

              Step 1: Identify the decision problem. -

              Step 2: Determine the decision alternatives. -

              Step 3: Evaluate costs/benefits of alternatives. -

              Step 4: Make the decision. -

              Step 5: Review the results of the decision. -

2. Indicate whether each of the following factors would be relevant or irrelevant to your decision:

a. The $5,000 you paid for your junker two years ago.

b. The $1,500 your vehicle is worth today.

c. The blue book value of the Jeep Cherokee.

d. The sticker price of the Hyundai Elantra.

e. The difference in fuel economy for the Jeep and the Hyundai.

f. The cost of on-campus parking.

g. The difference in insurance cost for the Jeep and the Hyundai.

h. The difference in resale value five years from now for the Jeep and the Hyundai.

i. The fact that the Hyundai comes with a warranty while the Jeep does not.

3. Consider only the costs you classified as irrelevant in #2 above.
   1. Would any of these costs be relevant if you were deciding whether to keep your present vehicle or buy a new one?
   2. Would any of these costs be relevant if you were deciding whether to get rid of your vehicle and ride your bike to work and school?

Answer 1

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Based on the following steps in the decision-making process, briefly describe the key factors you would consider at each step.

Capital Expenditures involves an analysis of various alternatives and the selection of the alternative which gives the highest return and has the best cost-benefit relationship.

Step 1: Identify the decision problem. - There is a requirement to buy a buy a new vehicle to be used for the next 5 years. The decision problem is to select the vehicle to be bought.

Step 2: Determine the decision alternatives. -In the given case, there are two alternatives to be chosen from. Namely Jeep Cherokee and Hyundai Elantra. Decision is to be made for purchase of one of the two given alternatives.

Step 3: Evaluate costs/benefits of alternatives. -The best alternative will be the one with least cost/ Least Outflow on a Net Present Value basis. For the cost/benefit analysis, all relevant costs as mentioned in #2 will be considered like Fuel Economy, Warranty, Insurance, Purchase Price among other factors will be considered.

Step 4: Make the decision. Based on a thorough analysis done in Step 3, a decision will be taken. Financial ability of the person will be considered and any long term impact and commitments along with any non-monetary factors will also be considered before making the decision.

Step 5: Review the results of the decision. - After the decision has been made and one alternative is chosen, regular follow up is done to see that the assumptions based on which the decision was made are actually holding true or not. Like Fuel Economy will be measured to see if it matches the data taken for decision making. In case of any variance, the reason need to be investigated and corrected if possible.

Indicate whether each of the following factors would be relevant or irrelevant to your decision:

Sr. No.	Costs	Type of Cost	Reason
a.	The $5,000 you paid for your junker two years ago.	Irrelevant	Sunk Cost- Already incurred.
b.	The $1,500 your vehicle is worth today.	Irrelevant	The decision is between two alternatives and price of current vehicle is not relevant.
c.	The blue book value of the Jeep Cherokee.	Relevant	Parameter of comparison of the two alternatives.
d.	The sticker price of the Hyundai Elantra.	Relevant	Parameter of comparison of the two alternatives.
e.	The difference in fuel economy for the Jeep and the Hyundai.	Relevant	Parameter of comparison of the two alternatives.
f.	The cost of on-campus parking.	Irrelevant	Assuming that cost of parking is same for the two alternatives.
g.	The difference in insurance cost for the Jeep and the Hyundai.	Relevant	Parameter of comparison of the two alternatives.
h.	The difference in resale value five years from now for the Jeep and the Hyundai.	Relevant	Parameter of comparison of the two alternatives.
i.	The fact that the Hyundai comes with a warranty while the Jeep does not.	Relevant	Parameter of comparison of the two alternatives.

Consider only the costs you classified as irrelevant in #2 above.

a.) Would any of these costs be relevant if you were deciding whether to keep your present vehicle or buy a new one?

In this case "b. The $1,500 your vehicle is worth today." would become relevant as $1500 will be taken as relevant cost if we decide to keep the present vehicle instead of buying a new one.

b.) Would any of these costs be relevant if you were deciding whether to get rid of your vehicle and ride your bike to work and school?

In this case, due to change in the decision to be taken, all costs would become irrelevant as none pertain to the decision at hand.