Your company has been awarded a 6-year maintenance contract for a project site 1

Question

Your company has been awarded a 6-year maintenance contract for a project site 100 miles out-of-town. You will earn $1,200 per month for your work, but you reali7e you need 10 purchase a more reliable vehicle before you can accept the job. You have done some research and you have two options that you are considering: Option A, New Economy Car: Initial cost Of the vehicle is $24,000. Monthly gas and maintenance is $124. You expect to use this car for 6 years before selling it. Resale value of the vehicle after 6 years is expected to be $10,000. Option B, used Economy Car: Initial cost of the vehicle is $12,000. Monthly gas and maintenance Is $334. You expect to only use this car for three years before selling it. Resale value of the vehicle after 3 years is expected to be $8.000. Which car has a better rate of return? Show a cash flow diagram. Solve for P. given G=50 P=G(P/G. 0.08,4)

Explanation / Answer

New Car Economy Car Cost $24,000 $12,000 Maintainence monthly 124 334 Life time 6 Years 3 Years Resle Value 10000 8000 Depreciation 2333 1333 Yearly Total Expenditure $3,821 $5,341      New Car is best because total yearly expenditure is lower than Economy Car, with this new car we car save $1520 yearly. If we purchase economy car it will be useful for only three years after we have to search for another car. Thats why we have to buy new car only. Working: Depreciation on New Car = (Purchase Cost - Solvage Value) / Life Time = (24000 - 10000) / 6 = 14000 / 6 Depreciation Per Year = $2333.33 Yearly Maintenance Cost = Monthly Cost * 12 = 124 * 12 = $1488 Yearly Expenditure = Depreciation + Maintenance Cost = 2333 + 1488 = $3821 Depreciation on Economy Car = (Purchase Cost - Solvage Value) / Life Time = (12000 - 8000) / 3 = 4000 / 3 Depreciation Per Year = $1333.33 Yearly Maintenance Cost = Monthly Cost * 12 = 334 * 12 = $4008 Yearly Expenditure = Depreciation + Maintenance Cost = 1333 + 4008 = $5341 Thank you.... New Car Economy Car Cost $24,000 $12,000 Maintainence monthly 124 334 Life time 6 Years 3 Years Resle Value 10000 8000 Depreciation 2333 1333 Yearly Total Expenditure $3,821 $5,341

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