Chapter 7, Problem 2E

Identifying Steps in Decision-Making Process and Relevant Costs
Assume you need to buy a new vehicle. The junker that you paid $5,000 for two years ago has a current value of $1,500. You have narrowed the choice down to a used 2008 Jeep Cherokee with a blue book value of $8,000 and a new Hyundai Elantra with a sticker price of $12,995. You plan to drive either vehicle for at least five more years.

1. List the five steps in the decision-making process and briefly describe the key factors you would consider at each step.
2. Indicate whether each of the following factors would be relevant or irrelevant to your decision:
(a) The $5,000 you paid for your junker two years ago.
(b) The $1,500 your vehicle is worth today.
(c) The blue book value of the Jeep Cherokee.
(d) The sticker price of the Hyundai Elantra.
(e) The difference m fuel economy for the Jeep and the Hyundai.
(f) The cost of on-campus parking.
(g) The difference m insurance cost for the Jeep and the Hyundai.
(b) The difference m resale value five years from now for the Jeep and the Hyundai.
(i) The fact that the Hyundai comes with a warranty while the Jeep does not.
3. Consider only the costs you classified as irrelevant in #2.
(a) Would any of these costs be relevant if you were deciding whether to keep your present vehicle or buy a new one?
(b) Would any of these costs be relevant if you were deciding whether to get rid of your vehicle and ride your be to work and school?