A new six-speed automatic transmission for automobiles offers an estimated 3% im

Question

A new six-speed automatic transmission for automobiles offers an estimated 3% improvement in fuel economy compared to traditional four speed transmissions in front-wheel drive cars. If a four-speed transmission car averages 32 miles per gallon and gasoline costs $3.25 per gallon, how much extra can a motorist pay for a fuel-efficient six-speed transmission? Assume that the car will be driven for 114,000 miles over its lifetime of 12 years. The motorist can earn 6% per year on investments. Assume miles driven each year are roughly constant. Click the icon to view the interest and annuity table for discrete compounding when the MARR is 6% per year. The motorist can pay for a fuel-efficient six-speed transmission extra $ . (Round to the nearest dollar.)

Explanation / Answer

Current mileage = 32 mile per gallon

For driving 114,000 miles, fuel needed = 114,000 / 32 = 3,562.5 gallons

A 3% improvement in fuel efficiency means, new mileage = 32 miles x 1.03 = 32.96 miles per gallon

For driving 134,000 miles, fuel needed = 114,000 / 32.96 = 3,458.74 gallons

Reduction in fuel requirement = (3,562.5 - 3,458.74) = 103.76 gallons

Total Cost savings at end of year 9 = 103.76 gallons x $3.25 per gallon = $337.22

Present value of this cost saving = $337.22 / (1.06)12

= $168

So, this is the maximum amount that consumer be willing to pay extra.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.