Marginal costs Personal Finance Problem JimmyJohnson is interested in buying a new Jeep SUV. There are two
Question:
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 |
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter