Suppose you wish to buy a car today. You have two choices, buy a new car for $10,000 or buy a used car for $6,000. The new car has an economic life of 6 years and you expect that it can be sold at the end of 6 years for $2,000. If you buy the used car, you plan to sell it in 3 years and expect to receive $600. Also, you expect that the used car will require $400 more a year than the new car for maintenance.

Assume your marginal tax rate equal to zero. If your opportunity cost of capital is 10%, would you choose the new or used car?

a) What is the Net Present Value for the new car?

b) What is the real annuity equivalent for the new car?

c) What is the present value for the used car?

d) What is the real annuity equivalent for the used car?

e) It is cheaper to buy the used car?

Answer rating: 100% (QA)

a Net Present Value for the new car 10000 2000 11106 10000 2... View the full answer