You are considering the purchase of a new car. You have chosen the model but are

Question

You are considering the purchase of a new car. You have chosen the model but are doubtful as whether to choose the Gasoline, Diesel or Electric versions. Data are as follows: Energy Source, Cost of Vehicle, Yearly upkeep costs GASOLINE, €28,000, €3,500 DIESEL, €30,000, €2,600 ELECTRIC€45,000, €520 Please assume the following: - Car will be paid up front. - Appropriate discount rate is 8%. - You will keep the car for 10 years. - Yearly upkeep costs include all costs incurred (fuel, maintenance, insurance, etc). - At the end of the 10 yr. period, residual value will be the same, so you do not need take this variable into account. - At any rate, no other variable (taxes, etc…) is relevant as they have all been taken into account in the computation of the above figures. Please state which should be your option from a purely financial point of view

Explanation / Answer

To Solve the problem, we have to get the present value of the total costs incurred on the car in the 10 years.

Present Value of costs incurred = Purchase cost + Yearly upkeep costs * PVIFA(8%, 10)

GASOLINE = €28,000 + €3,500 * 6.710 = €51,485

  DIESEL =  €30,000 + €2,600 * 6.710 = €47,446

ELECTRIC = €45,000 + €520 * 6.710 = €48,489.20

From Financial point of view, the DIESEL VERSION of car is the best because it carries lowest Present Value of costs incurred.

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