15 points) Rondo is in the market for a new car.He has narrowed his search down to 2 models.Model A costs $32,000 and Mo
15 points) Rondo is in the market for a new car.He has narrowed his search down to 2 models.Model A costs $32,000 and Model B costs $28,000.With both cars he plans to pay cash and own them for 4 years before trading in for a new car.His research indicates that the trade in value for Model A after 4 years is 60% of the initial purchase price,while the trade in value for Model B is 45%.The interest rate is 5%.For simplicity assume that operating and maintenance costs for the models are identical.Which model is the better decision and how much "cheaper" is it than the alternative?
Model A; 1430
Model A; 1257
Model B; 4000
Model A; 4000
Model B; 1207
Model B; 1430
First,based on your imformation,we can know the annual operating and maintenance costs
so we do a NPV analisis for both models.which model have a higher NPV,that is cheaper one
year model A model B
0 (32000) (28000)
1 (1430) (4000)
2 (1257) (1207)
3 (4000) (1430)
4 19200 12600
(in year 4,operating and maintenance costs should be repesented but not in your imformation,so the cash flow is the sale gain)
Take account of interest factor and look PRESENT VALUE TABLE
NPV of model A=-32000-1430*0.952-1257*0.907-4000*0.864+19200*0.823=-22155
NPV of model B=-28000-4000*0.952-1207*0.907-1430*0.864+12600*0.823=-23768
so MODEL A is cheaper one.