Bill’s father read that each year a car’s value declines by 10%. He also read that a new car’s value declines by 12% as it is driven off the dealer’s lot. Maintenance costs and the costs of “car problems” are only $200 per year during the 2-year warranty period. Then they jump to $750 per year, with an annual increase of $500 per year. Bill’s dad wants to keep his annual cost of car ownership low. The car he prefers cost $30,000 new, and he uses an interest rate of 8%. For this car, the new vehicle warranty is transferrable. (a) If he buys the car new, what is the minimum cost life? What is the minimum EUAC? (b) If he buys the car after it is 2 years old, what is the minimum cost life? What is the minimum EUAC? (c) If he buys the car after it is 4 years old, what is the minimum cost life? What is the minimum EUAC? (d) If he buys the car after it is 6 years old, what is the minimum cost life? What is the minimum EUAC? (e) What strategy do you recommend? Why?

Bill’s father read that each year a car’s value declines by 10%. He also read that a new car’s value declines by 12% as it is driven off the dealer’s lot. Maintenance costs and the costs of “car problems” are only $200 per year during the 2-year warranty period. Then they jump to $750 per year, with an annual increase of $500 per year. Bill’s dad wants to keep his annual cost of car ownership low. The car he prefers cost $30,000 new, and he uses an interest rate of 8%. For this car, the new vehicle warranty is transferrable. (a) If he buys the car new, what is the minimum cost life? What is the minimum EUAC? (b) If he buys the car after it is 2 years old, what is the minimum cost life? What is the minimum EUAC? (c) If he buys the car after it is 4 years old, what is the minimum cost life? What is the minimum EUAC? (d) If he buys the car after it is 6 years old, what is the minimum cost life? What is the minimum EUAC? (e) What strategy do you recommend? Why?

Personal Finance

13th Edition

ISBN:9781337669214

Author:GARMAN

Publisher:GARMAN

Chapter8: Vehicle And Other Major Purchases

Section: Chapter Questions

Problem 1FPC

See similar textbooks

Similar questions

Jim just got a coding job so he will need a new laptop. He finds a good one, which costs $20,000 and can be used for 6 years. After that, the computer will be useless with zero salvage value due to a massive coding work. Jim has insufficient money to buy it, but he can borrow funds at an annual interest rate of 2.5%. The tax rate is 28%. The store said if Jim chooses to lease the laptop, Jim will pay for $3,500 per year (pre-tax). What is the amount of the after- tax lease payment? a) $1,067.5 b) $2,520 c) $980 d) $87.5 e) $14,400
John is a very cost-conscious investor. His rule of thumb is that it costs $250 per year, starting in the first year of vehicle life to maintain an automobile. This expense increases by $250 each year over the life of the car. John is now considering the purchase of a five-year-old car with 40,000 miles on it for $8,000. How much money will John have to set aside now to pay for maintenance (as a lump sum) if he keeps this car for seven years? John’sinterest rate is 6% per year.
In order to buy a new car, you finance $20,000 with no down payment for a term of five years at an APR of 6%. After you have the car for one year, you are in an accident. No one is injured, but the car is totaled. The insurance company says that before the accident, the value of the car had decreased by 25% over the time you owned it, and the company pays you that depreciated amount after subtracting your $500 deductible.Suggestion: Use the following formula for the equity built up after k monthly payments. Equity = Amount borrowed × ((1 + r)k − 1) ((1 + r)t − 1) Can you pay off the loan using the insurance payment, or do you still need to make payments on a car you no longer have? Yes, you can pay off the loan using the insurance payment.No, you cannot pay off the loan using the insurance payment. If you still need to make payments, how much do you still owe? (Subtract the payment from the insurance company. Round your answer to the nearest cent. If you no longer…
In order to buy a new car, you finance $24,000 with no down payment for a term of five years at an APR of 6%. After you have the car for one year, you are in an accident. No one is injured, but the car is totaled. The insurance company says that before the accident, the value of the car had decreased by 25% over the time you owned it, and the company pays you that depreciated amount after subtracting your $500 deductible.What is your monthly payment for this loan? (Round your answer to the nearest cent.)
You own a house that you rent for $1,400 per month. The maintenance expenses on the house average $260 per month. The house cost $231,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $253,000. If you sell the house you will incur $20,240 in real estate fees. The annual property taxes are $3,100. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? Multiple Choice $232,760 $231,000 $228,000 $253,000 $0
You own a house that you rent for $1,200 a month. The maintenance expenses on the house average $200 a month. The house cost $89,000 when you purchased it several years ago. A recent appraisal on the house valued it at $120,000. The annual property taxes are $5,000. If you sell the house you will incur $25,000 in expenses. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?
a) Gerry likes driving small cars and buys nearly identical ones when- ever the old one needs replacing. Typically, he trades in his old car for a new one costing about $15 000. A new car warranty covers all repair costs above standard maintenance (standard maintenance costs are constant over the life of the car) for the first two years. After that, his records show an average repair expense (over standard maintenance) of $2500 in the third vear (at the end of the year), increasing by 50 percent per year thereafter. If a 30 percent declining- balance depreciation rate is used to estimate salvage values and interest is 8 percent, how often should Gerry get a new car? b) Gerry (see Problem a ) has observed that the cars he buys are some- what more reliable now than in the past. A better estimate of the repair costs is $1500 in the third year, increasing by 50 percent per year thereafter, with all other information in Problem a) being the same. Now how often should Gerry get a new car?
Mr. Russ T. Steele sels his old vehicle for $5000 (you get more if you private sale!) and pays cash for a used (but newer vehicle) that costs $10.000. He also understands that he needs to allow for maintenance and operation costs of his vehicle. He estimates that these costs will be approximately $2000 a year and estimates that the costs will increase by $100 per year. He hopes to keep the vehicle for five years and then sell it for an estimated value of $2000. Mr. Steele has an MARR of 8%. The equivalent annual cost of the cash flow associated with his purchase is most nearly: $-1,850 $-3,100 $3,000 $3,800
Caleb does not like the idea of taking out a loan to pay for a new vehicle. So instead, Caleb decides to invest $420 monthly into an. account paying 8% compounded monthly to save for a future vehicle. His goal is to save $30,000. How many full payments of $420 each month are needed? What is the balance of the account after all the full payments of $420 are deposited? $ How much will the last payment need to be to get $30,000? (If no additional payment is needed put 0): $
Seiko's current salary is $98,500. Her marginal tax rate is 32% and she fancies European sports cars. She purchases a new auto every year. Seiko is currently a manager for Idaho Supply Company. Her friend, knowing her interest in sports cars, tells her about a manager position at the local BMW and Porche dealer. The new position pays only $87,100 per year, but it allows employees to purchase one new car per year at a discount of $17,700. This discount qualifies as a non-taxable fringe benefit. In an effort to keep Seiko as an employee, Idaho Supply Company offers her a $12,400 raise. Answer the following questions about this analysis. (a) What is the annual after-tax cost to the Idaho Supply Company with the $12,400 increase? (Ignore payroll taxes) (b-1) Financially which offer is better on an after-tax basis? (b-2) By how much is the offer better for Seiko on an after tax basis (Assume that Seiko is going to purchase the car whether she switches jobs or not)
Baljeet, with his parents, wants to buy a local franchising hub. He found an interesting building which will cost her 40,000 rupees every beginning of each quarter increasing by 6% every quarter for 5 years. However, after paying for 3 years, he decided to stop because he got in an argument with his parents. How much money does he still owe (remaining balance) at the end of 3 years? If he wanted to continue the payment of 50,000 rupees every end of each year after the last payment, how long would it take for him to take ownership of the building? Money is worth 6% compounded semi-annually.
A home improvement firm has quoted a price of $9,800 to fix up Eric's backyard. Five years ago, Eric put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does Eric have enough money in his account to pay for the backyard fix-up?