Question

A college student has been looking for a new tires. The student feels that the warranty period is a good estimate of the tire life and that 10% interest rate is appropriate. Given 4 options find the minimum Equivalent Uniform Monthly Cost. (Note: the student wants to buy 4 tires)

Warranty time (months) | Tire price (all 4 tires)

12 | 31

24 | 51

36 | 69

48 | 94

Answer 1

ANSWER:

IN ORDER TO FIND THE EUAC WE WILL USE THE FOLLOWING FORMULA:

EUAC = P(A/P,I,N)

WHERE I = 10% OR 10% / 12 PER MONTH

N = 12 , 24 , 36 AND 48 MONTHS

1) 12 MONTH WARRANTY TIME = 31(A/P,10%/12,12) = 31 * 0.0879 = $2.7254

2) 24 MONTH WARRANTY TIME =51(A/P,10%/12,24) = 51 * 0.0461 = $2.3534

3) 36 MONTH WARRANTY TIME =69(A/P,10%/12,36) = 69 * 0.0323 = $2.2264

4) 48 MONTH WARRANTY TIME =94(A/P,10%/12,48) = 94 * 0.0254 = $2.3841

SINCE THE 36 MONTH WARRANTY TIME HAS THE LOWEST EUAC (MONTHLY) , THEREFORE THE STUDENT WILL CHOOSE THE 36 MONTH WARRANTY TIRE.