Explore BrainMass

Buying a new car after graduation

2) You are considering buying a new car after graduation. The first option is a Mercedes E320 Bluetec (you like the bio-diesel idea), which will cost you $50,000, and last 10 years. The other option is a Chevy Tahoe (better for hunting season), which will cost you $30,000, but last only five years. Assume that these prices include extended warranties (so you can ignore maintenance), and that either car is worthless at the end of its life. Ignore taxes, the cost of gasoline, and any other costs of ownership (insurance, etc.). Assume that all car prices are expected to increase at 3% per year, and that a fair nominal discount rate is 10%. If you receive equivalent utility from either option, which car should you buy on a cost basis? Justify your answer with appropriate calculations.

Solution Preview

See the attached file.

Mercedes E320 Bluetec

First, we will find the future price for the car according to the useful life of the car..

FV = PV (1+R)N where PV is the present value
R is the interest ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to find which car to buy after graduation.