Bill's father read that, at the end of each year, an auto mobile is worth 25% less than it was at the beginning of the year. After a car is three years old, the rate of decline reduces to 15%. Maintenance and operating' costs, on the other hand, increase as the age of the car increases. Because of the manufacturer's warranty, first-year maintenance is very low.
Age of Car Maintenance
(Years) Expense
1...................................$ 50
2 ................................... 150
3 ................................... 180
4 ................................... 200
5 ................................... 300
6 ................................... 390
7 ................................... 500
Bill decided this is a good economic analysis problem. Bill's dad wants to keep his annual cost of automobile ownership low. The car Bill's dad prefers costs $11,200 new. Should he buy a new or a used car and, if used, when would you suggest he buy it, and how long should it be kept? Give a practical, rather than a theoretical, solution.