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A $15,000 car that lasts five years with an average annual operating cost of $8,000, or...

A $15,000 car that lasts five years with an average annual operating cost of $8,000, or a $20,000 car that lasts six years with an average annual operating cost of $7,000. The interest rate is 8 percent for both options. Which option should you go for?
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Answer #1

  • Since option 2 has a lower equivalent annual cost, it should be selected.
  • Equivalent annual cost is used to evaluate alternate investments having unequal lifespan.

Calculation of Present value annual factor.

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