Question

John's 8-year-old Chevrolet Trail Blazer requires repairs estimated at $6,000 to make it road worthy again. His wife, Sherry, suggested that he should buy a 5-year-old used Jeep Grand Cherokee instead for $6,000 cash. Sherry estimated the following costs for the two cars: Trail Blazer $29,000 $6,000 Grand Cherokee $6,000 Acquisition cost Repairs Annual operating costs (Gas, maintenance, insurance) $2,780 $1,800 What should John do? What are his savings in the first year? O A. Buy the Grand Cherokee; $980 OB. Fix the Trail Blazer; $3,980 O C. Buy the Grand Cherokee; $7,800 OD. Fix the Trail Blazer, $6,780

Answer 1

The cost incurred in 1st year in both of the options will be as under:

	Trail Blazer	Grand Cherokee
Acquisition cost	$                 -	$          6,000
Repairs	$          6,000	$                 -
Annual operating cost	$          2,780	$          1,800
Total cost	$          8,780	$          7,800

If John continues with Trail Blazer, gets it repaired then total cost for the 1st year will be $ 8,780 (Acquisition cost of Trail Blazer will not be considered in this decision making as it is already incurred)

If John buys used Grand Cherokee then total cost for the 1st year will be $ 7,800

Looking to the 1st year figures, the option of buying used Grand Cherokee is cheaper than the option of repairing Trail Blazer, John should buy used Grand Cherokee. John will save $ 980 ( $ 8,780 - 7,800) if he opts for buying used Grand Cherokee.

Option A is correct: Buy the Grand Cherokee, $ 980

All other options are incorrect as they do not match with the calculations made.