You need to purchase a new car. You want the car with the lowest lifetime total...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You need to purchase a new car. You want the car with the lowest lifetime total net present value cost. You have narrowed the decision down to two vehicles, A and B, that are identical in features and styling except that: • Car A has a purchase price of $22,000 and fuel economy of 20 miles per gallon (mpg) and Car B has a purchase price of $31,000 and fuel economy of 40 mpg. Gasoline costs $2.50 today (beginning of year 1) and you expect it to go up 3% per year in nominal terms. Use a 6% nominal borrowing rate, and assume that you can finance 85% of the purchase price of the vehicle and must make a down payment of 15%. (Purchase is at the beginning of year 1 and annual payments start at the end of year 1.) Repayment is over 4 years. You expect the vehicle to last 11 years and you will drive 12,000 miles per year. Your personal discount rate is 8%. (a) Which vehicle has the lowest total cost over the course of its life? (b) What is the annualized total cost per mile for each vehicle? (c) What personal nominal discount rate makes you indifferent between the two vehicles? (d) What rate of gasoline price increase makes you indifferent between the two vehicles? (e) What is the breakeven purchase price of the more fuel efficient car? You need to purchase a new car. You want the car with the lowest lifetime total net present value cost. You have narrowed the decision down to two vehicles, A and B, that are identical in features and styling except that: • Car A has a purchase price of $22,000 and fuel economy of 20 miles per gallon (mpg) and Car B has a purchase price of $31,000 and fuel economy of 40 mpg. Gasoline costs $2.50 today (beginning of year 1) and you expect it to go up 3% per year in nominal terms. Use a 6% nominal borrowing rate, and assume that you can finance 85% of the purchase price of the vehicle and must make a down payment of 15%. (Purchase is at the beginning of year 1 and annual payments start at the end of year 1.) Repayment is over 4 years. You expect the vehicle to last 11 years and you will drive 12,000 miles per year. Your personal discount rate is 8%. (a) Which vehicle has the lowest total cost over the course of its life? (b) What is the annualized total cost per mile for each vehicle? (c) What personal nominal discount rate makes you indifferent between the two vehicles? (d) What rate of gasoline price increase makes you indifferent between the two vehicles? (e) What is the breakeven purchase price of the more fuel efficient car?
Expert Answer:
Answer rating: 100% (QA)
To calculate the total cost of each car over its lifetime we need to consider the following costs 1 ... View the full answer
Related Book For
Cost Management A Strategic Emphasis
ISBN: 978-0078025532
6th edition
Authors: Edward Blocher, David Stout, Paul Juras, Gary Cokins
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...
-
A yo-yo moves downward until it reaches the end of its string, where it "sleeps." As it sleeps-that is, spins in place-its angular speed decreases from 35 rad/s to 25 rad/s. During this time it...
-
Briefly discuss the IASB and FASB efforts to converge their accounting guidelines for leases.
-
If the aircraft in Problem 17 has a wing area S = 200 ft 2 and the value of CL = 0.5 at (L/D)max, find the sea level airspeed where Dmin occurs.
-
How to use the Internet to gather facts?
-
The buyer of real estate made a down payment. The contract stated that the buyer would be liable for damages in an amount equal to the down payment if the buyer broke the contract. The buyer refused...
-
Hartford, Inc. manufactures a single product. Shown are projected revenues and costs based on last year's income statement (8,000 units) and practical capacity (10,000 units). The costs are either...
-
You, CA, an audit senior at Grey & Co., Chartered Accountants, are in charge of this year's audit of Plex-Fame Corporation (PFC). PFC is a rapidly expanding, diversified, publicly owned entertainment...
-
Represent the equation below in Java programming syntax. x = B + 4AC
-
Swiss Chocolates Ltd produces blocks of chocolate. Raw materials in the form of cocoa solids, milk and sugar are added at the beginning of the process, flavouring, fruit and nuts are added half-way...
-
Information from the records of Manufacturing Systems Pty Ltd for the year ended 30 June 2019 is given below. Required (a) Calculate the ending work in process inventory on 30 June 2019. Factory...
-
Listed below are selected financial data from the accounting records of Innovative Computers Pty Ltd for the year ended 30 June 2019. Required (a) Prepare an income statement for the year ended 30...
-
For each company below, fill in the missing data. Each company is independent. Sales Beginning finished goods Cost of goods manufactured Ending finished goods Cost of sales Income Statement Company X...
-
Go to the Securities and Exchange Commissions A Plain English Handbook at http://www.sec.gov/pdf/handbook.pdf. Scroll down to Appendix B and look at the four before and after examples. What kinds of...
-
Read the scenario then answer the two (2) questions below: Barnes Properties owns a recently completed new high-rise building in Newcastle at 1 National Park Street. It leases Shop 1 on the Ground...
-
Listed below are several terms and phrases associated with basic assumptions, broad accounting principles, and constraints. Pair each item from List A (by letter) with the item from List B that is...
-
Using the information in Exercise 20-40 for Yum, Inc. Required: Determine the valuation of the company at the end of 2013 using each of the following three methods. Assume earnings and cash flows for...
-
Market Makers Inc. (MMI) provides a range of services to its retail clients-customer service for inquiries, order taking, credit checking for new customers, and a variety of related services. Auto...
-
Beaumont Specialty Chemicals, Inc. (BSC), is a manufacturer of specialty chemicals sold to manufacturers, hospitals, and other users. BSC produces about one million gallons of its main product BSC-22...
-
Assume Knowlton Holdings Ltd. completed these long-term non-strategic investment transactions during 2020 : 1. Journalize Knowlton's investment transactions assuming the company reports any changes...
-
Suppose on February 1, 2020, General Motors paid \(\$ 41\) million for a \(40 \%\) investment in ABC Ltd., an auto parts manufacturer. Assume \(A B C\) earned net income of \(\$ 6\) million and paid...
-
Return to exercise SB-7, the Prudential Bache (PB) investment in CitiCorp bonds. Journalize the following on PB's books: a. Purchase of the bond investment on January 2, 2020. PB expects to hold the...
Study smarter with the SolutionInn App