Note, for this question, you may find information from the live session in Module $4$ usefil$)$ You are making a decision about purchasing a new car.

You can choose between an electric vehicle that requires very high upfront costs, a somewhat cheaper hybrid vehicle and a traditional gasoline powered vehicle. Your discount rate for future cash flows is $10\%.$

The upfront cost of each car is:

Electric: $$80,000$

Hybrid: $$60,000$

Gas: $$45,000$

In the first year you estimate the running costs $($including fuel, insurance, maintenance etc.$)$ to be:

Electric: $$2,000$

Hybrid: $$5,000$

Gas: $$7,500$

You assume that these costs will increase at an inflation rate of $5\%.$ That is$,$ year $2$ costs will be $5\%$ higher than year $1$ costs and year $3$ costs will be $5\%$ higher than year $2$ costs.

a$)$ You plan to keep the car for $10$ years. For each car, calculate the present value of your costs. Which one ends costing less in present value terms? $(1$ pt$)$

b$)$ If instead you wanted to replace the car after $5$ years, what would now cost less in present value terms? $(0\mathrm{.}5pts)$

What do you think are the limitations of this present value approach? Is there anything else you would tike to consider when making this decision? $(0\mathrm{.}5pts)$