Chapter 5, Problem 33P

Stan Moneymaker has been informed of a major automobile manufacturer’s plan to conserve on gasoline consumption through improved engine design. The idea is called “engine displacement,” and it works by switching from 8-cylinder operation to 4-cylinder operation at approximately 40 miles per hour. Engine displacement allows enough power to accelerate from a standstill and to climb hills while also permitting the automobile to cruise at speeds over 40 miles per hour with little loss in driving performance. The trade literature studied by Stan makes the claim that the engine displacement option will cost the customer an extra $1,200 on the automobile’s sticker price. This option is expected to save 4 miles per gallon (an average of in-town and highway driving). A regular 8-cylinder engine in the car that Stan is interested in buying gets an average of 20 miles per gallon of gasoline. If Stan drives approx-imately 1,200 miles per month, how many months of ownership will be required to make this $1,200 investment pay for itself? Stan’s opportunity cost of capital (i) is 0.5% per month, and gasoline costs $4.00 per gallon. (5.3)