Question

13-45 A professor of engineering economics owns an older car. In the past 12 months, he has paid $2,000 to replace the transmission, bought two new tires for $160, and installed a CD player for $110.

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13-45 A professor of engineering economics owns an older E car. In the past 12 months, he has paid $2000 to replace the transmission, bought two new tires for $160, and installed a CD player for S110. He wants to keep the car for 2 more years because he invested money 3 years ago in a 5-year certificate of deposit, which is earmarked to pay for his dream machine, a red European sports car. Today the old car's engine failed. The professor has two alternatives. He can have the engine overhauled at a cost of $1800 and then most likely have to pay another $800 per year for the next 2 years for maintenance. The car will have no salvage value at that time. Alternatively, a colleague offered to make the professor a $5000 loan to buy another used car. He must pay the loan back in two equal installments of $2500 due at the end of Year 1 and Year 2, and at the end of the second year he must give the colleague the car. What interest rate is the professor paying on the loan from his colleague, if the vehicle will be worth $3000 after 2 years? Is this an ethical interest rate? The "new" used car has an expected annual maintenance cost of $300. If the professor selects this alternative, he can sell his current vehicle to a junkyard for $500. Interest is 6%. Using present worth analysis, which alternative should he select and why?

Answer 1

In this problem, an engineering professor has an old car. It has to be used for another two years. After this period one of his investment mode three years back will mature, from its proceeds he will buy a new one. Now the car engine has failed. Two alternatives are available, you have to calculate present value and then take the decision. Anternative-1 have you have to overhaul the machine. I will cost $ 1800 per year. Also there will be maintenance of $ 800 per year. Thus annual outflow will be $ 1800 + $ 800 = $ 2,600 per year for 2 years No salvage value is realized, so at 6% interest, present value of cash outflow is $ 2, 600/1.05 + $2, 600/1.05^2 = $2,476.19 + $ 2358.28 $ 4,834.47 \r\n Second option In this problem, his friend will give a loan $ 5,000 to buy an used model loan is repaid at