Marginal costs Personal Finance Problem Jimmy Johnson is interested in buying a new Jeep SUV. There are two options available, a V-6 model and a V-8 model. Whichever model he chooses, he plans to drive it for a period of 55 years and then sell it. Assume that the trade-in value of the two vehicles at the end of the 55-year ownership period will be identical. The two models have definite differences, and Jimmy needs to make a financial comparison. The manufacturer's suggested retail price (MSRP) of the V-6 and V-8 are $30,070 and $44,440, respectively. Jimmy believes the difference of

$14,370 to be the marginal cost difference between the two vehicles. However, many more data are available, and you suggest to Jimmy that his analysis may be too simple and will lead him to a poor financial decision.

Assume that the prevailing discount rate for both vehicles is 5.6% annually. Other pertinent information on this purchase is shown in the

a. Calculate the total "true" cost for each vehicle over the 55-year ownership period.

b.Calculate the total fuel cost for each vehicle over the 55-year ownership period.

c.What is the marginal fuel cost from purchasing the larger V-8 SUV?

d.What is the marginal cost of purchasing the larger and more expensive V-8 SUV?

e.What is the total marginal cost associated with purchasing the V-8 SUV? How does this figure compare with the $14,370 that Jimmy calculated?

	V-6		V-8
MSRP	$ 30 comma 070$30,070			$ 44 comma 440$44,440
Engine (liters)	3.73.7			5.75.7
Cylinders	6			8
Depreciation over 5 years	$ 17 comma 228$17,228			$ 25 comma 600$25,600
Finance charges over entire 5-year period	$ 5 comma 235$5,235			$ 7 comma 737$7,737
Insurance over 5 years	$ 7 comma 499$7,499			$ 8 comma 103$8,103
Taxes and fees over 5 years	$ 2 comma 165$2,165			$ 2 comma 945$2,945
Maintenance/repairs over 5 years	$ 5 comma 700$5,700			$ 5 comma 700$5,700
Average miles per gallon	1919			1414
Ownership period in years	55			55
Miles driven per year over 5 years	13 comma 00013,000			13 comma 00013,000
Cost per gallon of gas over 5-year ownership	$ 3.44$3.44			$ 3.44$3.44

Answer rating: 100% (QA)

To calculate the total true cost for each vehicle over the 55year ownership period we need to consid... View the full answer