Question

The goal is to estimate annual equivalent cost of car ownership.

General outline.

find a price quote for a new vehicle, resale price for the same model, annual maintenance cost and gas expenses;

assume annual mileage to obtain annual gas expense;

time of ownership of two vehicles should not be equal.

Some hints.

you can use www.edmunds.com, www.canadianblackbook.com or any other website of your choice to choose two cars you wish to compare. You can use the same website to obtain a used car quote (your resell price). You may ignore sales taxes in this assignment;

you can use www.edmunds.com/tco.html or www.internetautoguide.com/17-1/cost-of-ownership.html to estimate maintenance cost for year one – year five, but you will need to type in a valid US zip-code. You may use 02222 for Boston. You can take average over five-year period to assume annual maintenance expense, and assume that costs in year six and beyond will be equal to costs in year five;

you may use the following link to obtain a gas price quote: www.cbc.ca/ns/news/interactives/gasprices;

www.fueleconomy.gov can be used as a source of data on combined city/highway fuel economy. Any other source will do as well;

http://calculator-converter.com converts mile per gallon (MPG) into L/100 km metric;

note: if you choose a rare vehicle – eg, Aston Martin – you might have trouble finding resale price;

finally, if you find using websites above complicated, use any other sources of data for this assignment. If you find it difficult to obtain some data, make assumptions. This is not a data searching exercise, so do not invest more than 15-20 minutes on data acquisition.

**Estimate annual equivalent cost for each vehicle at a
discount rate of five percent.** **Please make sure
you show all your sources of information, work and
formulas.**

Answer #1

Audi R8

Listed price: $221000

Resale price: $74800

Let’s take an example of an Audi R8. Its purchase price is $221000 and resell value is $74800 with a 5 year long economic life. Annual maintenance expense is $7200 which includes Fuel, Insurance, Repairs & Maintenance cost.

First of all we have to calculate the project factor which is calculated as below:

→ 1 – (1 / (1+5%) * 5)) / 5%

→ (1 – 0.7835) / 0.05

→ 4.33

Resell value at the end of 5 years: $74800

Resell value at the PV factor will be based on PV factor @ 5% discount rate

PVIF (5%, 5 years) = 0.7835

Resell value: $74800 x 0.7835 = $58606

Equivalent Annual Cost (EAC) is determined by the following formula:

(Cost of the asset – resell value) / project factor applicable + Annual cost

($221000 - $58606) / 4.33 + $7200

= $37504 + $7200

= $44704

Therefore, the EAC of the car is $44704

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