General Assignment: My friend drives a 2010 Nissan Altima with ? 105,500 miles.
ID: 2441482 • Letter: G
Question
General Assignment:
My friend drives a 2010 Nissan Altima with ? 105,500 miles. Assuming he could drive this car for up to 5 more years and then sell, calculate the equivalent uniform annual cost of ownership over the next 5 years.
Specific Instructions:
Estimate 6 costs of ownership over the next 5 years. He knows his car is aging, so at least two of your cash flows need to be gradient cash flows. Explain each of your estimates (e.g. if you estimate a salvage value, explain why). There are many sources of information about costs for cars (library, internet, local mechanics,. . . ). The more specific your information is to this car, the better.
Compute his EUAC, showing work.
Now perform a sensitivity analysis by considering if one of the factors you have estimated was either 20% higher than you estimated or 20% lower than you estimated. How will this affect your EUAC.
Identify one replacement options and calculate the same set of costs of ownership for that car.
Determine if and when you would recommend him to replace his car.
Grading
- Each of the five specific instructions is worth 20 points.
- For each 20-point instruction, 15 points are for following instructions (and correct computation)
I will check one (at random) of your sources, did you estimate 6 cash flows, were 2 of them gradients
I will check your work to see if EUAC is correct.
Discuss the role of economic analysis in the decision-making process.
Discuss what variables are missing from your analysis and why. Discuss the role uncertainty plays in this decision-making process.
“The average salvage value for a 2001 model vehicle today is $1,000.00” [Source X]
oRegardless of whether this information and source are correct, this uses no specific information about the make/model/mileage, and doesn't account for 5 more years of lost value by the end of the horizon.
2. Not showing any work, I can't follow what you did.
- THIS IS TO BE DONE IN GROUPS NO LARGER THAN 2: Vehicles have many costs of ownership, and there are many sources of information about them, so I expect different estimates from each of you. If two or more groups have very similar estimates, I'll be fairly suspicious.
Explanation / Answer
Solution for general assignment : Assumed interest rate as 15% as there is no mention.
EUAC = 105,500 ( A/P, 15% 5 )
= 105,500 ( 0.2983 )
= 31470.65
Specific instructions : I would like to take taxes, salvage value, depreciation, insurance, maintenance, rent.
Taxes : Taxes will be paid when ever we incur income and when we acquire asset we will get income . Considering an amount of$2000 towards taxes.
Salvage value : estimated resale value at the end of the useful life. Considering an amount of $ 5,000 towards salvage value.
Depreciation : reducing the value of an asset. For every asset for every year it will be deprecated. Depreciation of $ 5,000 for every year.
Insurance : insurance will be taking on the asset. Insurance of $800 for every year.
Maintenance : For every asset there will be some maintenance costs that will incur. Maintenance of $600
Rent : For an asset to keep it we require some space for which we will pay rent. Rent of $3,000 for every year.
EUAC = 105,000( A/P, 15%,5 )-2000(A/P, 15%,5 )-5000(A/P, 15%, 5)-5000(A/P,15% ,5 )-800( A/P, 15%, 5)-600(A/P, 15%, 5)-3000( A/P,15%,5)
=105000(0.2983)-2000(0.2983)-5000(0.2983)-5000(0.2983)-800(0.2983)-600(0.2983)- 3000(0.2983)
= 31,470.65 - 596.6 - 1491.5 - 1491.5 - 238.64 - 178.98 - 894.9
= 26,578.53
It is not a wise statement and it is not correct to keep costs it will effect (31,470.65 - 26,578.53) = 4,892.12
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