Question

Ahmed made a survey in the market for the purpose of buying a new car. The fuel economy is one of his major concerns as he is traveling frequently during his business. The two options are: (1) 2020 Ford Explorer which costs SR 129489. It has an average gas consumption rate of 0.11 liters/ Kilometer (2) 2020 Mazda CX 9 which costs SR 162396 with an average gas consumption rate of 0.07 liters/ Kilometers. The expected Kilometers distance travelled for each vehicle is the same which is 30145 Kilometers a year, and the cost of gas is supposed to be SR 0.85 per liter. Each car is expected to have a 15-year life. At the end of 15 years, the first car will have a salvage value of SR 23466, and the second motor will have a salvage value of SR 31746. Consider the MARR to be 9%. Determine which car should be purchased based on the PW criterion.

Answer 1

Here,

Cost of Fuel = 0.85 per liter

MARR = 9%

Life for both = 15 years

For Ford,

Initial Cost = 129489

Average Gas Consumption =0.11 litres per KM

KM per year = 30145

Fuel Per year = 30145 *0.11 = 3315.95

Cost of Fuel per year = 0.85 * 3315.95 = 2818.558

Salvage Value = 23466

For Mazda,

Initial Cost = 162396

Average Gas Consumption =0.07 litres per KM

KM per year = 30145

Fuel Per year = 30145 *0.07 = 2110.15

Cost of Fuel per year = 0.85 * 2110.15 = 1793.628

Salvage Value = 31746

So Cash Flow we have,

		Ford	Mazda
28-06-2020	Year 0	129489	162396
28-06-2021	Year 1	2818.558	1793.628
28-06-2022	Year 2	2818.558	1793.628
28-06-2023	Year 3	2818.558	1793.628
28-06-2024	Year 4	2818.558	1793.628
28-06-2025	Year 5	2818.558	1793.628
28-06-2026	Year 6	2818.558	1793.628
28-06-2027	Year 7	2818.558	1793.628
28-06-2028	Year 8	2818.558	1793.628
28-06-2029	Year 9	2818.558	1793.628
28-06-2030	Year 10	2818.558	1793.628
28-06-2031	Year 11	2818.558	1793.628
28-06-2032	Year 12	2818.558	1793.628
28-06-2033	Year 13	2818.558	1793.628
28-06-2034	Year 14	2818.558	1793.628
28-06-2035	Year 15	-20647.4	-29952.4
	Net Present Value	145764.2	168140.4

Since NEt present Value of Cost for Ford is less so ford should be chosen

NPV is found by usnig XNPV function in excel