Question

INTRODUCTI0N

Rebecca shook her head and gave a loud sigh as she hung up the phone from talking with her dad.

"What is it?" her roommate Claire asked.

"Per usual, Daddy Jim wants me to use my 'schooling, as he likes to call it, to help him decide whether to buy a new crew cab truck with either a diesel or a gas engine," Rebecca replied.

"Well, maybe he will forget all about it if you just wait him out, "Aaire offered.

"Oh no, you do not know him like I do. He will expect a full analysis, or I will never hear the end of it!"

"Well, maybe you will think twice before bragging to him about your examination scores in accounting after this," Claire said.

"You got that right! I will have to get on it right after my last final, or there will be no peace over break," Rebecca responded.

THE MODELS AND ENGINES

Rebecea opened the last e-mail from her dad to find the following information he compiled about the purchase decision. Jim made it quite clear that he wanted a 4 \times 4 to be able to get his boat up the steep, sandy ramp he used most frequently. His friend, Kashef, had a late-model truck that impressed Jim very much. Any truck in this class that he chose would offer standard equipment, which is a huge step up from the 2012 Scion iQ he had bought when gas surged in 2012. However, Jim was not sure whether getting the standard engine (the V6), or paying extra for the V8 or Diesel made any sense. That is where Rebecca came in.

The engine choices were a 3.6-liter V6 rated at 295 horsepower, a 3.0-liter dicsel V6 rated at 240 horsepower, or a 5.7-liter V8 rated at 360 horsepower. All of the trucks were capuble of pulling Jim's boat, a 17 -foot Carolina Skiff that weighed just short of 1,500 lbs. including the boat, motor, and gear.

Vehicle mileage was one issue at hand, as well as Jim's driving habits. 'The V6's Environmental Protection Agency (EPA) rating was 17 city miles per gallon MIP(;) and 25 highway MIPG, while the diesel was rated 21 city MIP G and 29 highway MPG. 'The V8 was rated at 15 city MPG and 22 highway MIPG. 'The manufacturer suggested 89 octane fuel for the V8, but Jim indicated he would use 87 octane unless engine pinging became pronounced. The manufacturer's "Build and Price" feature indicated that the V6 came standard, but the diesel was a $ 4,270 option, and a V8 was a $ 1,250 option.

GAS AND DIESEL PRICES

In his e-mail to Rebecea, Jim said diesel usually ran $ 0.25 more per gallon than unleaded gas. He was not sure whether this was accurate but thought it was in the ballpark. Rebecea wondered about this, since she had never paid attention to diesel prices in her own trips to fill up. She decided to check the price differential by visiting the U.S. Energy Infomation Administration website. See 'Table for the information she found.

Without computing the averages, she noticed there was a premium for diesel compared with regular gasoline, as reported by the U.S. Energy Infomation Administration averages." Jim's estimate of $ 0.25 appeared a bit high. She noted that she could obtain more 

specific fuel price information bused on geographic location. But there was also an issue of whether the area where Jim drives was in an area requiring reformulated or conventional fuel. Because she lacked specific details and needed to get toa review sersion for intermediate das, Rebecea decided to use the U.S. averages.

DRIVING HABITS

Rebecca did not need an e-mail to tell her about Jim's driving habits. He had recently commented that his current Scion iQ had topped 100,000 miles after five and a half years of ownership. He bought that car as a reaction to the spike in fuel prices in 2012 and regretted his decision ever since.

Rebecea suspected that the miles he drove per year had declined some since she and her siblings had gone off to college more than three years ago even though they usually refused to ride in his car, because, frankly, it was embarrassing, As Rebecca graduated and went off to college and with her siblings in the Peace Corps overseas, Jim would not have to drive them around anymore, thereby reducing his mileage. Rebecea also knew that \mathrm{Jim} and her mother would take driving vacations as they became empty nester. She decided that Jim would continue to drive approximately 18,000 miles per year for the foreseeable future. Her best guess was that 60% of his driving was highway miles, while 40 \% were driven in the city.

Jim had been very thrifty throughout his life. He was a very cautious investor, even more so now that he was getting older. During Rebecca's last trip home, he had said that he thought he could continue to earn a return on all of his investments of 3.75% per year, which was in line with the Wall Street Journal Prime Rate. Because of his thriftiness, Jim had accumulated enough wealth to pay cash for the purchase of the new car without affecting his or Rebecca's mom's lifestyles.

CONCLUSION

A car horn startled Rebecca out of her automotive ruminations. She motioned to her roommate that she will be out in a minute for their well-deserved, end-of-semester dinner. Rebecea knew she would need to put her thoughts into a more usable format before heading home over break. So diesel got better mileage, but it costs more per gallon and was a large additional cost at the time of purchase. This would require more than an armchair approach. Did she have all the information she needed to perform her analysis? What approach should she use to give her dad the best information to make a decision?

QUESTI0NS:

1. What data does Rebecea need to help perform the analysis for her dad?

2. What assumptions should she use in her calculations?

3. What technique should Rebecea use to solve this problem?

4. What might Rebecca's solution look like?

5. What recommendation should Rebecea make? How should it be presented to Jim?

Answer 1

page 1 Given data that Rebecca Shook hegy bead and gave a doud sigh as she hung up the phone from tallsing with besy dad. Gasoline and diesel polices pe gallon sep 2016 to નૂebબuoળવું જેવું Sep16 oct 16 Nov 16 dec 16 Jan 17 feb17 Avesjage won gasoline 2324 2359 2295 2366 2458 2416 polices all goades Aveg age 0.4 diesel 2,394 2454 2439 251 2.58 2568 Prices All types i Bebecca needs the following infogmation to perform the Analysis - the Additional cost of pustchasing a V8 and a diesel (oversy and above the cost of the v6), the psyemium of diesel ovega gab, millage of all the 3

page 2 (UG diesel and vs) vasliants , deyiving habits of besy dad (in tesimo of numbesy of Kms he's likely to delive Annually), how much of the dsgiving would be highway and how much city, how long would be own the Trucks fool, any savings fojom the diesel would need to be discounted back to the present value so we would also need the discount Rate. 2) The following Assumptions need to be made, based eithes on logical calculations 09 common sense- a) The Avegage pojemium of diesel oves gasoline (based on the given 6 months data) is $0.121 (gounded) b) Hey dad has owned the cuspent t guck for about 6 yeasys, but considesying that be 094 the kids westenit every geally happy with Tsyuck, the Amumed ownership pesiod would be mogle for the next tsucks. A pespiod of 8 yeags seems Appropriate lin the ball pais)

page3 3) This is basically a bejeak even Analysic to checks If the numbesy of kilomet ses doiven · the . of city and highway doiving, and the numbeglas of yeagas of ownegjship would yield goueatesy Savings than the premium of the diesel. 4) The Vg is not very Impoortant to ousy Thalysis because pusjely from an economic pegyspective it doesnt make any sense. It costs mogje, gives lessest mileage and the incoyemental powes has no Additional Usage for her dad as all the 3 toucks will get the job done ( Accouding to the text). Among the diesel and V6. The polemium of the diesel option vs. VG (at the time of buying) : $4240 Foco 18,000 miles a year the 606. highway miles would mean of total of 0:6* 18000 = 10,800 highway miles at a mileage of 25 mp G fosy VG and 29MP G fosy the diesel. So this part

- page 1 the V6 would consume (10,800 / 25) = 432 gallons of gas , Whegjeas the diesel would tase (10,800/aq) - 372.4 gallons of diesel. Toy the city of it , the miles agje 0.4* 18000 92000 miles. The vo would give a mielage of armpg and consume (7200/20) - 342.85 gallons of gas, whereas the diesel would give 25 Mpg and consume (7200/25) 288 gallons of diesel Quest 1 yea, the Total gas consumption of V6 would be (432 +342-85) = 174.85 gallons of gas , and the diesel would consume (372.4+288) = 66014 gallons of diesel. fogy an Auegage polemium of $ 0.1 Q1 pess gallons of diesel. fou an Avessage Premium of $ odal peso gallon of disel. The Yeasily saving fojom owning the diesel is (1 444. 85 x police of gasoline) - (660-4) + (price of gasoline + $ 0-lau)) .

pages Assuming an avesjage gasoline price of $2:4 (ball pack) this puts the diesel police assumption at $ 2521This puts the Annual saling at $ 194.441 Assuming an 8 year ownegship pesjiod, the Popesent value of the saving (discounted at the given poime spate of 3.450/) is $ 1324.99 5. The Poemium of diesel engine is moge than the savings from it (given his doiving style and any seasonable ownegship Pestiod Asumption) so it makes sense to go f09 the v6. Jim should be told he's better off buying the v6 and the eagning 3.45.1. on the money be saves from not buying the diesel . This would make perfect sense and Appeal to him.