Reference no: EM13947049

Time value of Money problem. Use present value to determine how much financial difference there is between the following two car buying strategies. Assume both buyers purchase cars immediately and then follow their respective car buying strategies. The analysis ends in twenty years with both buyers purchasing new cars. Assume money has a value of 12% for both buyers. BUYER ONE • Purchases a new car every two years. • The cost of the car purchased at the start of the twenty year analysis depends on the first letter of your last name: • A-F $20,000 • G-M $30,000 • N-R $40,000 • S-Z $50,000 • The cost of a new car increases 3% every year. • The buyer always purchases the same type car. • There are no maintenance costs associated with this buyer’s cars. They are traded in before they have maintenance costs. • The buyer gets a trade in worth 2/3 of the purchase price of the car. BUYER TWO • Purchases a new car every ten years. • Buys exactly the same type of car as Buyer One. • The buyer receives one tenth of the purchase price as a trade-in. • Maintenance costs are incurred: • Year one: none • Year two: none • Year three: 1% of the purchase price • Year four: 2% • Year five: 3% • Year six: 4% • Year seven: 5% • Year eight: 6% • Year nine: 7% of the purchase price • Year ten: no expenditure, the car is traded in before yearly maintenance. Write a cover memo in business format summarizing your results and the methodology (and any other assumptions) you used. What conclusions can you draw? (e.g Who would need to have the most money at the start of the twenty years to fund their car buying strategy? How much would they need? Take the difference between the PV of the expensive car buying strategy and the PV of the less expensive strategy and project how much more money the low PV person will have in twenty years.)