Johanna was contemplating the purchase of a new, more fuel efficient vehicle to replace her SUV. She estimates that she could drive the SUV for another 3 years before it would have no remaining value. She currently spends $4,300 per year on fuel and she estimates that with the new vehicle her annual fuel costs would be $1,000. The new car will cost $21,000 and the auto dealer will give her $5,000 as a trade-in on her SUV. All other costs remain the same and she would pay cash for the difference between the new car price and the trade-in allowance. For purposes of this problem set, presume a discount rate of 8%, that the purchase is made today, and that all of the fuel purchases are made at the end of each of the 3 years.

Answer rating: 100% (QA)

To evaluate whether purchasing the new vehicle is financially advantageous for Johanna we need to co... View the full answer