Bill’s father read that each year a car’s value declines by 10%. He also read that a new car’s value declines by 12% as it is driven off the dealer’s lot. Maintenance costs and the costs of “car problems” are only $200 per year during the 2-year warranty period. Then they jump to $750 per year, with an annual increase of $500 per year. Bill’s dad wants to keep his annual cost of car ownership low. The car he prefers cost $30,000 new, and he uses an interest rate of 8%. For this car, the new vehicle warranty is transferrable. (a) If he buys the car new, what is the minimum cost life? What is the minimum EUAC? (b) If he buys the car after it is 2 years old, what is the minimum cost life? What is the minimum EUAC? (c) If he buys the car after it is 4 years old, what is the minimum cost life? What is the minimum EUAC? (d) If he buys the car after it is 6 years old, what is the minimum cost life? What is the minimum EUAC? (e) What strategy do you recommend? Why?
Bill’s father read that each year a car’s value declines by 10%. He also read that a new car’s value declines by 12% as it is driven off the dealer’s lot. Maintenance costs and the costs of “car problems” are only $200 per year during the 2-year warranty period. Then they jump to $750 per year, with an annual increase of $500 per year. Bill’s dad wants to keep his annual cost of car ownership low. The car he prefers cost $30,000 new, and he uses an interest rate of 8%. For this car, the new vehicle warranty is transferrable. (a) If he buys the car new, what is the minimum cost life? What is the minimum EUAC? (b) If he buys the car after it is 2 years old, what is the minimum cost life? What is the minimum EUAC? (c) If he buys the car after it is 4 years old, what is the minimum cost life? What is the minimum EUAC? (d) If he buys the car after it is 6 years old, what is the minimum cost life? What is the minimum EUAC? (e) What strategy do you recommend? Why?
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