Rondo is in the market for a new car. He has narrowed his search down to...

Rondo is in the market for a new car. He has narrowed his search down to 2 models. Model A costs $39,000 and Model B costs $34,000. With both cars he plans to pay cash and own them for 4 years before trading in for a new car. His research indicates that the trade in value for Model A after 4 years is 59% of the initial purchase price, while the trade in value for Model B is 41%. The interest rate is 4%. For simplicity assume that operating and maintenance costs for the models are identical. Which model is the better decision and how much "cheaper" is it than the alternative?

ANSWER: Model A; $2,753.0 (EXPLAIN)

Expert Solution

The present value of cost will be calculated for both models. Present value of cost is equal to Initial cost minus Present value of salvage amount. Salvage amount is calculated as percentage of initial cost which are given in problem. NPV factor is calculated as below:

Where r is interest rate which is 4% or 0.04

n is number of years which is 4 years.

The calculation is explained in following table:

The present value of cost of Model A is $19,326 and model B is $22,081. Thus Model A is cheaper. The difference is calculated as below:

Thus, model A is cheaper by $2,755

jeff jeffy answered 2 years ago

Table 11.8 An operations manager has narrowed down the search for a new plant for Burdell...

Table 11.8 An operations manager has narrowed down the search for a new plant for Burdell Industries to three locations. Fixed and variable costs follow. Location Fixed Cost Variable Cost A $100,000 $10 B $150,000 $7 C $200,000 $5 Use the information in Table 11.8 to determine the best statement. A. Location C is the best one if volumes are quite high. B. The breakminuseven quantity between C and B is more than 30,000 units. C. The breakminuseven quantity between...

A firm has narrowed down the search for its new plant location to three locations. The...

A firm has narrowed down the search for its new plant location to three locations. The fixed and variable costs for each of the three locations are as given below: Location Fixed Cost Variable Cost A $100,000 $10 B $150,000 $7 C $200,000 $5 The break-even quantity between C and B is more than 20,000 units. True False

Suppose you are considering purchasing a new car. You and your spouse have narrowed it down...

Suppose you are considering purchasing a new car. You and your spouse have narrowed it down to two choices: a. Sedan Initial Price: $27,300 Annual O&M: $4,456 Expected trade-in value after 5 years: $9,100 b. SUV Initial Price: $38,795 Annual O&M: $3,050 Expected trade-in value after 5 years: $18,544 If you intend to keep your new vehicle for 5 years, then trade it in, determine the net present value (NPV) of each alternative, assuming a discount rate of 4.0%. Which...

Your professor is going on vacation. He has narrowed down a list of potential hotels, but...

Your professor is going on vacation. He has narrowed down a list of potential hotels, but he is still overwhelmed by the data. He loves great food and wants to do all the activities at the resort. 1. Develop two unique ways to display the data (two unique types of charts) to show him where he should stay. 2. Recommend the best way to present the data. Write a narrative summary of what hotel you recommend based on the data...

Your BANA II professor is going on vacation. He has narrowed down a list of potential...

Your BANA II professor is going on vacation. He has narrowed down a list of potential hotels, but he is still overwhelmed by the data. He loves great food and wants to do all the activities at the resort. Refer to the attached Excel workbook to complete the following 2 questions: 1. Develop two unique ways to display the data (two unique types of charts) to show him where he should stay. Save the graphs in the Blackboard Midterm Tab....

u are looking for a car and have narrowed it down to two options. You can...

u are looking for a car and have narrowed it down to two options. You can buy a new car at a cost of $23,995, which has estimated life of 12 years and annual maintenance costs of $750 per year. Your second option is a used car at a cost of $14,225, with an estimated remaining life of 7 years and annual maintenance costs of $1800 per year. Which is the cheaper option, given your borrowing cost of 7%?

Keith Golding has decided to purchase a personal computer. He has narrowed his choices to two:...

Keith Golding has decided to purchase a personal computer. He has narrowed his choices to two: Brand A and Brand B. Both brands have the same processing speed, hard disk capacity, RAM, graphics card memory, and basic software support package. Both come from companies with good reputations. The selling price for each is identical. After some review, Keith discovers that the cost of operating and maintaining Brand A over a three-year period is estimated to be $200. For Brand B,...

Suppose that you are thinking about buying a car and have narrowed down your choices to...

Suppose that you are thinking about buying a car and have narrowed down your choices to two options. The new car option: the new car costs $26,000 and can be financed with a four-year loan at 7.54%. The used car option: a three-year old model of the same car costs $14,000 and can be financed with a three-year loan at 7.07%. What is the difference in monthly payments between financing the new car and financing the used car? Use PMT...

Donald is in the market for a used car. He has found the same sports car...

Donald is in the market for a used car. He has found the same sports car at two different dealerships and is now considering which dealer he should purchase the car from. Dealer 1 requires Donald to get the loan through their lending department. Dealer 1 has told Donald that because they do their own financing, they can get Donald the very best loan possible and Donaldwill only have to pay $365 per month for 60 months (5 years). Dealer...

Paul is in the market for a used car. He has found the same sports car...

Paul is in the market for a used car. He has found the same sports car at two different dealerships and is now considering which dealer he should purchase the car from. Dealer 1 requires Paul to get the loan through their lending department. Dealer 1 has told Paul that because they do their own financing, they can get Paul the very best loan possible and Paul will only have to pay $315 per month for 48 months (4 years)....

Question