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In: Economics

A consulting engineering firm is trying to decide whether it should purchase Ford Explorers or toyota...

A consulting engineering firm is trying to decide whether it should purchase Ford Explorers or toyota 4runners for company principals. The models under consideration would cost $29,000 for the Ford and $32,000 for the Toyota. The annual operating cost of the explorer is expected to be $200 per year less than that of the 4runner. The trade in values after 3 years are estimated to be 50% of first cost for the explorer and 60% for the Toyota. If the firm MARR is 18% per year, which make of vehicle should it buy?

- Honda

- Toyota

- lexus

- Ford

Solutions

Expert Solution

The Ford would cost $29,000 and the Toyota 4runner would cost $32,000. The MARR per year is 18%. Therefore, for Ford explorer the per year return would be, $29,000*18% = 5220. Therefore, for three years it would be, $5220*3 = $15,660. The operating cost of the vehicle per year is, $200. Therefore, for three years it would be, $200*3 = $600. So, subtracting $600 in vfrom trade$15660 = $15060. Trade in value for Ford after three years would be 50% of the first cost of the vehicle. Therefore, the trade in price would be, $29,000*50% = $14,500. The trade in value for Ford is lesser than the actual value of the car after three years. After three years as per MARR the vale of the car should be, $15060.

For Toyota 4runner, the cost of the car is $32,000. If the MARR is 18% per year, then the return per year would be, $32,000*18% = $5760. For three years it would be, $17280. The annual operating cost is lesser than $200. If we consider operating cost to be $200 (as the actual figure is not provided), then the total cost would be, $200*3 = $600. Trade in value of the Toyota after three years would be 60% of the cost of the vehicle, so the trade in value will be, $32,000*60% = $19200. The actual cost of the vehicle after three years would be, $17280 - 600 = $16680. The trade in value is greater than the actual cost of the vehicle.

Therefore, the consumer should buy Toyota 4runner as the trade in value of the vehicle is greater than the actual cost of the vehicle after three years.

Rahul Sunny answered 1 year ago
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