Question

You are looking for a car and have narrowed your choice down to two options. You...

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.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

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 -

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Your roommate is looking for a new car and evaluating two different options. One is a...
Your roommate is looking for a new car and evaluating two different options. One is a BMW 5 series, which costs $60,000 and has an average maintenance cost of $1,000 in the first year and $1,500 in each of the following years (She would choose a 5 year lease). The other option is a Acura which costs $50,000 and has an average maintenance cost of $500 in the first year and $1,000 in years 2-3, and $2,000 in years 4-7...
Your roommate is looking for a new car and evaluating two different options. One is a...
Your roommate is looking for a new car and evaluating two different options. One is a BMW 5 series, which costs $60,000 and has an average maintenance cost of $1,000 in the first year and $1,500 in each of the following years (She would choose a 5 year lease). The other option is a Acura which costs $50,000 and has an average maintenance cost of $500 in the first year and $1,000 in years 2-3, and $2,000 in years 4-7...
) A garage is comparing the cost of buying two different car hoists. Hoist A will...
) A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will require servicing of $500 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist? A) Hoist A, since it has a greater equivalent annual annuity. B)...
Rondo is in the market for a new car. He has narrowed his search down to...
Rondo is in the market for a new car. He has narrowed his search down to 2 models. Model A costs $35,000 and Model B costs $30,000. With both cars he plans to pay cash and own them for 4 years before trading in for a new car. His research indicates that the trade in value for Model A after 4 years is 57% of the initial purchase price, while the trade in value for Model B is 43%. The...
Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would...
Brooks Clinic is considering investing in new heart-monitoring equipment. It has two options. Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be higher. Since the Option B machine is of initial higher quality, it is expected to have a salvage value at the end of its useful life. The following estimates were made of the cash flows....
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has...
Tulsa Company is considering investing in new bottling equipment and has two options: Option A has a lower initial cost but would require a significant expenditure to rebuild the machine after four years; Option B has higher maintenance costs, but also has a higher salvage value at the end of its useful life. Tulsa’s cost of capital is 11 percent. The following estimates of the cash flows were developed by Tulsa’s controller:   A B Initial Investment 320,000 454,000 Annual Cash...
You are looking to purchase a new car, and you expect to have annual maintenance costs...
You are looking to purchase a new car, and you expect to have annual maintenance costs to keep it running. According to your calculations, you expect to incur $150 maintenance costs in the first year and expect the costs to increase by $75 for the next 7 years. You plan to keep the car for 8 years in total. How much money should you have in your savings account today, so that you do not have to worry about maintenance?...
Your company is looking at purchasing a front-end loader and has narrowed the choice down to...
Your company is looking at purchasing a front-end loader and has narrowed the choice down to two loaders. The investment in the larger loader yields the NPV of $28,372. The smaller loader would have a useful life of five years with a salvage value of $10,000 at the end of the fifth year. The smaller loader can be billed out at $90.00 per hour. It costs $28 per hour to operate the smaller front-end loader and $25 per hour for...
You can continue to use your less efficient old machine with an initial cost zero and...
You can continue to use your less efficient old machine with an initial cost zero and a maintenance cost of $8,960 annually for the next five years. Alternatively, you can purchase a more efficient new machine for $12,000 initial cost today, plus $5,000 annual maintenance with the same 5 years life. At a cost of capital of 15%, you should: A. Buy the new machine and save $380 in equivalent annual annuity. B. Keep the old machine and save $380...
Paula is considering the purchase of a new car. She has narrowed her search to two...
Paula is considering the purchase of a new car. She has narrowed her search to two cars that are equally appealing to her. Car A costs $23,000, and Car B costs $23,500. The manufacturer of Car A is offering 0% financing for 48 months with zero down, while the manufacturer of Car B is offering a rebate of $2000 at the time of purchase plus financing at the rate of 3%/year compounded monthly over 48 months with zero down. If...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT