Chapter 4.A, Problem 42E

Making Decision. Consider the following situations, which each involve two options. Determine which option is less expensive. Are there unstated factors that might affect your decision?

41. You currently drive 250 miles per week in a car that gets 21 miles per gallon of gas. You are considering buying a new fuel-efficient car for $16,000 (after trade-in on your current car) that gets 45 miles per gallon. Insurance premiums for the new and old car are $800 and $400 per year, respectively, you anticipate spending $1500 per year on repairs for the old car and having no repairs on the new car. Assume gas costs $3.50 per gallon. Over a five-year period, is it less expensive to keep your old car or buy the new car?

42. You currently drive 300 miles per week in a car that gets 15 miles per gallon of gas. You are considering buying a new fuel-efficient car for $12,000 (after trade-in on your current car) that gets 50 miles per gallon. Insurance premiums for the new and old car are $800 and $ 600 per year, respectively. You anticipate spending $1200 per year on repairs for the old car and having no repairs on the new car. Assume gas costs $3.50 per gallon. Over a five-year period, is it less expensive to keep your old car or buy the new car?

43. You must decide whether to buy a new car for $22,000 or lease the same car over a three-year period. Under the terms of the lease, you make a down payment of $1000 and have monthly payments of $250. At the end of three years, the leased car has a residual value (the amount you pay if you choose to buy the car at the end of the lease period) of $10,000. Assume you can sell the new car at the end of three years at the same residual value. Is it less expensive to buy or to lease?

44. You must decide whether to buy a new car for $22,000 or lease the same car over a four-year period. Under the terms of the lease, you make a down payment of $1000 and have monthly payments of $300. At the end of four years, the leased car has a residual value (the amount you pay if you choose to buy the car at the end of the lease period) of $8000. Assume you can sell the new car at the end of four years at the same residual value. Is it less expensive to buy or to lease?

45. You have a choice between going to an in-state college where you would pay $4000 per year for tuition and an out-of-state college where the tuition is $6500 per year. The cost of living is much higher at the in-state college, where you can expect to pay $700 per month in rent, compared to $450 per month at the other college. Assuming all other factors are equal, which is the less expensive choice on an annual (12 month) basis?