You are contemplating the purchase of an automobile and have narrowed the field down to two...

 

Transcribed Image Text:

You are contemplating the purchase of an automobile and have narrowed the field down to two choices. Car A costs $20,000, is expected to have a low maintenance cost of $1,000 per year (payable at the beginning of each year after the first year), but has a useful mileage life that for you translates into 4 years. Car B costs $30,000 and has an expected maintenance cost of $2,000 per year (after the first year) and a useful life of 6 years. Neither car has a salvage value. The annual interest rate is 10%. Which car should you buy? You are contemplating the purchase of an automobile and have narrowed the field down to two choices. Car A costs $20,000, is expected to have a low maintenance cost of $1,000 per year (payable at the beginning of each year after the first year), but has a useful mileage life that for you translates into 4 years. Car B costs $30,000 and has an expected maintenance cost of $2,000 per year (after the first year) and a useful life of 6 years. Neither car has a salvage value. The annual interest rate is 10%. Which car should you buy?

Answer rating: 100% (QA)

To determine which car to buy we need to compare the present value of the total costs for each car T... View the full answer