Question

ntro You currently don't have a car, but rent a car that's parked just outside your house whenever you need one. Your annual expenditure on rental cars is $2,300. You've now considering purchasing a car that would give you the same level of convenience as your current life style. The car costs $25,000 and can be sold for $5,000 after 10 years. You'd purchase the car with money from your savings account which always earns an interest rate of 6% Assume that all cash flows occur at the end of each year (maybe because you drive much more around Thanksgiving and Christmas). Part 1 Attempt 1/1 for 10 pts. What is the present value of the benefits of owning that car, i.e., saving on rental expenses and selling the car? No decimals Submit Part 2 Attempt 1/8 for 4 pts. Should you buy the car? O Yes ONo

Answer 1

1). Annual Expenditures on the rental will be saved once we purchase the car.

So,

PV of Benefits = PV of Savings + PV of Selling Price

= [($2,300/0.06) x {1 - (1.06)^-10}] + [$5,000/1.06¹⁰]

= [$38,333.33 x 0.4416] + $2,791.97

= $16,928.20 + $2,791.97 = $19,720.17

2). As the PV of benefits is less than the cost of car. Hence, we shouldn't buy the car.