a) Gerry likes driving small cars and buys nearly identical ones when- ever the old one needs replacing. Typically, he trades in his old car for a new one costing about $15 000. A new car warranty covers all repair costs above standard maintenance (standard maintenance costs are constant over the life of the car) for the first two years. After that, his records show an average repair expense (over standard maintenance) of $2500 in the third year (at the end of the year), increasing by 50 percent per year thereafter. If a 30 percent declining- balance depreciation rate is used to estimate salvage values and interest is 8 percent, how often should Gerry get a new car?
a) Gerry likes driving small cars and buys nearly identical ones when- ever the old one needs replacing. Typically, he trades in his old car for a new one costing about $15 000. A new car warranty covers all repair costs above standard maintenance (standard maintenance costs are constant over the life of the car) for the first two years. After that, his records show an average repair expense (over standard maintenance) of $2500 in the third year (at the end of the year), increasing by 50 percent per year thereafter. If a 30 percent declining- balance depreciation rate is used to estimate salvage values and interest is 8 percent, how often should Gerry get a new car?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:a) Gerry likes driving small cars and buys nearly identical ones when-
ever the old one needs replacing. Typically, he trades in his old car for a new
one costing about $15 000. A new car warranty covers all repair costs above
standard maintenance (standard maintenance costs are constant over the life of
the car) for the first two years. After that, his records show an average repair
expense (over standard maintenance) of $2500 in the third vear (at the end of
the year), increasing by 50 percent per year thereafter. If a 30 percent declining-
balance depreciation rate is used to estimate salvage values and interest is
8 percent, how often should Gerry get a new car?
b) Gerry (see Problem a ) has observed that the cars he buys are some-
what more reliable now than in the past. A better estimate of the repair costs is
$1500 in the third year, increasing by 50 percent per year thereafter, with all
other information in Problem a) being the same. Now how often should
Gerry get a new car?
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