Help Center Question 10 A person has the option to either buy or rent a taxi for

ID: 1106457 • Letter: H

Question

Help Center Question 10 A person has the option to either buy or rent a taxi for a MARR 8% Option -1 ( Buy a car ) The following is the expenses related to a car (All amounts in AED) Price of the car Insurance Service Cost/ Year Petrol Cost Value after 5 years :50000 : 2000 1500 3/ Km 20000 Option 2 (Rent a car) 11 AED / Km Answer the following questions Question Correct Match F. Annual Cost of buying a car can be computed as follows -50,000(AP 8%, 5 )-2000-1500 3425000(AF 8% 5) How many Km/ Year will be the break even point ? J. 1400 8, Buy a car which optionisbetter when the person uses 2000 Km/ Year All Answer Choice 0,1 888FA

Explanation / Answer

Price of car (AED)

50000

Insurance (AED)

2000

Service cost/yr (AED)

1500

Petrol cost (AED/km)

Value after 5 years (AED)

20000

Minimum Annual rate of return (MARR) = 8%

Let x is the kms. travelled in 5 years,

Let car earn a rent of 25,000:

1) Annual cost of buying the car = -50000 (A/P,8%,5) - 2000 - 1500 - 3x – 25000 (A/F,8%,5)

= -50,000 * .08*(1.08^5) /(1.08^5-1) – 3500 – 3x- 25,000* .08/(1.08^5-1)

= -50,000 * 0.25 – 3500 – 3x- 25,000*0.17

= 4761.41 – 3x

2) to compute the breakeven point :

4761.41 – 3x = 0

X= 1587.14 km

3) for x = 2000 km,

The net annual cost = 4761.41 – 3*2000 = -1238.59

Thus, the better option would be to buy the car.