Question

Assume that you are buying a car and you are deciding between three cars: one new car using a lease, another that is a financed purchase, and finally, a pre-owned vehicle. Describe how you would approach choosing between the different vehicles and consider how your process would be similar or different from the project selection process. Include in your post answers to the following questions:

- Could the process used for choosing between cars be applied to selecting between projects to fund within a company? What would be the same, and what would be different? Why?

- Critique the process you used for selecting between vehicle acquisition alternatives. What are some changes you might make to the process so that it is useful in the context of project selection?

Answer 1

Ideally, we should choose an option for car based on Total Cost of Ownership (TCO). Total Cost of Ownership includes:

1. Acquisition Cost

2. Ownership Cost

3. Post Ownership Cost

4. Opportunity Cost

I would look at the TCO for each option after knowing the age of the vehicle (maybe say 5-7 years). I would also like to know the salvage value of the vehicle at the end of its life.

The vehicle option with least TCO should be chosen.

Same analogy can be used for project selection in companies based on NPV (Net Present Value). Here, the total age of the vehicle will be replaced by the life of the project. Salvage value of the project would also be required.

The project with highest NPV should be chosen.