Alex has enjoyed driving his VW GTI for the past four years, but now that the warranty period is expiring, he needs to consider his next car. Alex wants to go electric and is considering between the VW ID.4 and the Tesla Model 3. Both cars cost $4 0,000, although only the VW qualifies for a $7,500 federal tax credit that reduces the car's effective price by this amount. (Tesla has sold too many electric cars to qualify for this credit.)

Alex prefers to buy the VW ID.4 and stay with VW. While the ID.4 price is non-negotiable, Alex is locked in with a VW salesperson on the trade-in value for his GTI. Trading in his old car with VW not only offsets the price of the new car by the trade-in value but also helps him save the 7% sales tax on the trade-in value (tax deductible). The $7,500 federal tax credit is however not tax deductible. Therefore, if the new car price is $40,000 and the old car's trade-in value is $10,000, then his out-of-pocket payment would be ($40,000 - $10,000) * 1.07 - $7,500 = $24,600.

If the trade-in negotiation with VW breaks down, Alex would instead buy the Tesla Model 3. Tesla offers very low trade-in values for used cars and he would be better off selling his VW GTI to CarMax which has offered to pay $14,500. On the flip side, he would need to pay a sales tax on the entire new car price of $40,000, and would receive no federal tax credit.

In Alex's negotiation with the VW salesperson over the GTI's trade-in value, what is Alex's BATNA? What is his Walk-away price?

Answer rating: 100% (QA)

BATNA Best Alternative to a Negotiated Agreement Alexs BATNA is the alternative course of action he ... View the full answer