Question

Sean is considering a new car. He expects to own it for 5 years. It costs $29100. It will cost $3042 per year for insurance, gas, and maintenance. After 5 years its salvage value will be $7390. He expects to finance the entire cost of the car at an effective annual interest rate of 5.5% per year. Do a present worth analysis of the cost of this vehicle using his loan rate as his TVOM. Report your cost as a positive number.

Answer 1

Initial cost, P = $ 29,100

Annual cost, A = $ 3042

Time, n = 5 years

Salvage value, S = $ 7390

Interest rate, i = 5.5%

The present value can be written as

Here, I have considered Salvage value negative since we have to express cost as positive number.

Plug in the value in the above equation

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