Question

Your roommate is looking for a new car and evaluating two different options. One is a BMW 5 series, which costs 560,000 and has an average maintenance cost of $1,000 in the first year and $1,500 in each of the following years (She would choose a 5 year lease). The other option is a Acura which costs $50,000 and has an average maintenance cost of $500 in the first year and $1,000 in years 2-3, and $2,000 in years 4-7 (She would chose a 7 year lease). Which option should your roommate choose based on the EAC? Use a cost of capital of 8.5%

Answer 1

Date: Date: for calculating EAC we need I first of all, Present Value of under both the option: to future calculate Costs Costs Calculation of Present value of option- I - BMW 5 Series years Costs PriF 8.5% 0 $ 60,000 1.0000 $ 1000 0.9217 $ 1500 0.8495 $ 1500 0.7829 $1500 0·7216 $ 1500 0.6650 occoes Prof Cost $60,000 $ 921.70 $1274.50 $ 11 74.50 $ 1082.40 $ 997.50 Present Value Of Coste = $65450.60 2. Present value of years Costs $ 50,000 $500 $1000 $ 1000 $ 2000 $2000 $2000 $ 2000 Hogewo-op Costs - Option. 2 - Prif@ 8.5% 10000 0.9217 0.8495 0.7829 0.7916 0.6650 0.6129 0.5649 Acura PV of Cost $50000 $ 460.85 $ 849.50 $782.90 $1443.20 $ 1330.00 $ 1295.80 $ 1129.80 Present value of Costs = $57222.05

Calculation of EAC EAC Present value of Costs (PriF 8.5%, n years) BMW = $65 450.60 - 3.9406 $16609 Acura = $57222.05 5.1185 a $ 11149 Based on EAC Roomate should choose option I. ie Acura, because it has lowest EAC $ 11149 Hence Option I should be Selected.