Question

Kristen is thinking about buying an expensive sports car to replace the car she bought last year. She would drive the same number of miles regardless of which car she owns and would rent the same parking space. The sports car’s variable operating costs would be roughly the same as the variable operating costs of her old car. However, her insurance and automobile tax and license costs would go up. What costs are relevant in estimating the incremental cost of owning the more expensive car? Explain.

(3) Regarding the question (2), is there any non-financial matters Kristen might consider for her final decision?

Answer 1

-The variable cost of operating the car is only the relevant cost for the decision making in this case, as all other costs are unaffected by the decision.

-The costs which are relevant in this decision making of owing a more expensive car is as follows:

1.The purchase cost of new car.

2.The sales value of old car.

3.Insurance cost, automobile tax, and license cost of new purchases.

-Following Non- financial matters to be taken into consideration by Krisetn for her final decistion-

1.What is the condition of the old car

2.How new expensensive car is to be financed

3.In case of borrowing, then waht is the borrowing rate and interest to be paid.

4.Ability to buy the expensive car

5.What are the other opportunity costs

6.Inflation rate

7.How safe is to dive the old car

8.timing of maintainance expenses etc.