Question

Suppose that you have an old car that is a real gas guzzler. It is 10 years old and could be sold to a local dealer for $500 cash. The annual maintenance costs will average $800 per year into the foreseeable future, and the car averages only 10 miles per gallon. Gasoline costs $3.40 per gallon, and you drive 17,000 miles per year. You now have an opportunity to replace the old car with a better one that costs $6,000. If you buy it, you will pay cash. Because of a 2-year warranty, the maintenance costs are expected to be negligible. This car averages 32 miles per gallon. Should you keep the old car or replace it? Utilize a 2-year comparison period and assume that the new car can be sold for $4,000 at the end of year 2. Assume that the salvage value of the old car at the end of year 2 will be $0. Ignore the effect of income taxes and let your MARR be 13% Click the icon to view the interest and annuity table for discrete compounding when MARR 13% per year. The AW of the old car is $(Round to the nearest dollar.)

Answer 1

Annual cost of gasoline for old car = 17000 / 10 * 3.40 = 1700 * 3.4 = 5780

Annual cost of gasoline for new car = 17000 / 32 * 3.40 = 531.25 * 3.4 = 1806.25

AW of old car = -500 * (A/P, 13%,2) - 800 - 5780

= -500 * 0.5995 - 800 - 5780

= -6879.75 ~ -6880 (Nearest Dollar)

AW of new car = -6000 * (A/P, 13%,2) - 1806.25 + 4000 * (A/F, 13%,2)

= -6000 * 0.5995 - 1806.25 + 4000 * 0.4695

= -3525.25 ~ - 3525 (Nearest Dollar)

As annual cost of new car is less, old car should be replaced