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You own a paid up, older car with an estimated remaining life of 3 years. You would like to replace this car with a new one, which you intend to trade in after 3 years. Is this purchase justified given the following information:

First cost of OLD CAR zero
First cost of NEW CAR \$7500

Annual insurance of OLD CAR \$400
Annual insurance of NEW CAR \$600

Annual fuel cost of OLD CAR \$1500
Annual fuel cost of NEW CAR \$900

Annual maintenance cost of OLD CAR \$400
Annual maintenance cost of NEW CAR \$200

Trade in value after 3 years for OLD CAR is \$600
Trade in value after 3 years for NEW CAR is \$5800

Minimum attractive rate of return 12%

The annual costs are the average expected during the life of the cars.

Use Present worth Method.

Solution Preview

You own a paid up, older car with an estimated remaining life of 3 years. You would like to replace this car with a new one, which you intend to trade in after 3 years. Is this purchase justified given the following information:

First cost of OLD CAR zero
First cost of NEW CAR \$7500

Annual insurance of OLD CAR \$400
Annual insurance of NEW CAR \$600

Annual fuel cost of OLD CAR \$1500
Annual fuel cost of NEW CAR \$900

Annual maintenance cost of OLD CAR \$400
Annual maintenance cost of NEW CAR \$200

Trade in value after 3 years for OLD CAR is \$600
Trade in value after 3 years for NEW CAR is \$5800

Minimum attractive rate of return 12%

The annual costs are the ...

Solution Summary

The solution evaluates the purchase of a new car to replace an old car.

\$2.19