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.

Answer 1

Capital Expenditures involves careful analysis and research over the solutions available and deciding on the alternative that is bound to give the highest returns. We can summarize the situation as follows :-

I am in a requirement to buy a new vehicle. The junker that i had bought 3 years ago has a salvage value of $1,500 which can be used to buy a replacement vehicle which i am planning to use for 5 years.

The steps in the decision making process include :-

1.) IDENTIFY THE PROBLEM:-

The problem here is the need for a replacement vehicle. The junker that i have is not meeting my requirements because of which i am in look out for replacement options to buy a new vehicle.

2.) THE DECISION ALTERNATIVES :-

In the process of looking out for a replacement vehicle for my needs and based on the research i have done, i have filtered my choice to either fo the two vehicles. - A used 2016 Jeep Cherokee with a blue book value of $8,500 and a new Hundai Elantra with a sticker price of $20,380. These are the options available to me for the Capital expenditure decision that i need to make.

3.) EVALUATE THE COSTS/BENEFITS:-

We can summarize the data as follows :-

	Particulars	Jeep Cherokee	Hyundai Elantra
	Cost Price	8,500	20,380
Less:-	Salvage proceeds	1,500	1,500
	Payment required	7,000	18,880
	Loan Required		11,880
	Rate of interest 12%		12.00%
	Duration of Loan		2 years
	Depreciation per year	1,400	3,776

4.) MAKE THE DECISION As can be seen from the above, while a Jeep Cherokee will require a payment of $7,000 , the Hyundai Elantra would require a payment of $18,880. Based on the funds that are available to me, i realize that i would require a loan to the amount of $11,880. The depreciation per year would be $1,400 for Jeep Cherokee and $3,776 for Hyundai (Based on straight line basis and no residual value). The benefit of buying a Hyundai Elantra car is that i might have to spend lesser on maintenance costs as i would getting few services free of cost from the manufacturer and also since the car is new, it would comparitively involve lesser maintenance expenses.

Based on the spending capacity and the loan option that i possess, i would make an Investment to go for the purchase of a Hyundai Elantra because of the following factors :-

a.) The maintenance costs will be relatively cheaper.

b.) The quality of the car would be better as it is a new vehicle.

c.) The model of the car is in line with the latest design and technologies.

d.) I would get increased depreciation cover which indirectly reduces the tax burden.

e.) Based on the reviews and research with the people who are using the cars, i feel that Hyundai Elantra suits my needs better compared to Jeep Cherokee.

5.) REVIEW THE RESULTS OF THE DECISION

Based on the decision made and after the usage of Hyundai Elantra, i noted the following points :-

a.) The driving experience of the car is smooth

b.) The after sales service provided by Hyundai and its maintenance is top notch.

c.) There is very less to minimal wear and tear in the car even after the usage of 1 year.

d.) The car matches my needs and desires and perfectly fits the bill for my family and i am happy in the investment that i made.

e.) Since rate of interest on the loan is minimal and monthly availability of funds, i am paying the dues on time.