Question

A used car can be kept for two more years and then sold for an estimated $3000, or it could be sold now for $7500. The average annual maintenance cost over the past 7 years has been $500 per year. However, if the car is kept for two more years this cost is expected to be $1800 the first year and $2000 the second year. As an alternative a new car can be purchased for $22,000 and be used for 4 years, after which it can be sold for $8000. The new car will be under warranty for the first 4 years, and not extra maintenance cost will be incurred during those years. If the MARR is 15% per year what is the better option and why?
a. Keep car, do not buy new one because EUAC Defender is $5111 and EUAC of Challenger is $6104

b. Buy new car because EUAC of challenger is $4904 and EUAC and defender is $5111

c. Buy new car because EUAC of Challenger is -$9308 and EUAC of defender is $498

Answer 1

Answer:

b. Buy new car because EUAC of challenger is $4,904 and EUAC defender is $5,111.

Explanation:

If the used car is kept its current worth is $7,500. The maintenance for next two years will be $1,800 and $2,000. The total maintenance expense for next two years will be 3,800. The net book value for car after two years will be $7,500 - 3,800 = 3,700.

The car can then be sold for $3,000. There will be net loss of $700 value of the car. The new car cost $22,000 but all maintenance cost is saved. The best option then is to buy new car.