Question: I am struggling with this following practice problem. How do I solve it? Today, you plan to make a cash purchase for a new car.

I am struggling with this following practice problem. How do I solve it?

Today, you plan to make a cash purchase for a new car. The Honda costs $24,000 and you estimate the car will last 10 years and require 600 gallons of gas per year. The Toyota costs $28,000 but gets better gas mileage, so it will only require 400 gallons of gas per year. The cars are identical in all of aspects, and both will be worthless after 10 years.

Assume that gas prices will rise by the rate of inflation of 1.95178%. If the nominal interest rate is 9% per year, which car should you purchase and why?

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