Question

You are looking for a car and have narrowed your choice down to
two options. You can buy a new car at a cost of $23,995, which has
an estimated life of 12 years and annual maintenance costs of $750
per year. Your second option is a used car at a cost of $14,225,
with an estimated remaining life of 7 years and annual maintenance
costs of $1,800 per year. Which is the cheaper option, given your
borrowing cost of 7%?

a. The new car, since it has a lower equivalent annual annuity.

b. The used car, since its costs have a lower PV

c. The new car, since its costs have a lower PV

d. The used car, since it has a lower equivalent annual annuity.

e. The used car, since it has a higher equivalent annual annuity.

Answer #1

*Correct answer:* **a. The new car, since it has a
lower equivalent annual annuity.**

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

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