Reference no: EM131610423

A wise consumer decides to perform an economic analysis to compare two different automobiles intended for use over the next 8 years. The first auto, manufactured by Gord and named the Pony, averages 21 miles per gallon and costs $23,000. Consumer Reports says that the time between failures is gamma with a shape parameter of 2.8 and a scale parameter of 4000 miles with an average repair cost of $480. Routine servicing is required every 5000 miles at a cost of $120. Trade-in value after 8 years is estimated to be $9500. The second auto, manufactured by General Auto (GA) and named the Neptune, averages 19 miles per gallon and costs $21,000. It has a time between failure distribution that Consumer Reports says is minimum extreme value with a scale parameter of 820 and a location parameter of 9100 miles. Average repair cost as advertised by GA is $395. Routine servicing is required every 7000 miles at a cost of $150. Trade-in value after 8 years is estimated to be $11,000. The wise consumer averages 16,000 miles per year and has an available investment rate of return of 4 percent. Inflation is expected to average 3.2 percent over the next decade. Given the cost of gasoline will average $2.80 a gallon, which automobile should be purchased based only on the economic data provided? How would the life cycle costs compare if the cost of gasoline averages $3.50 a gallon and the automobile is driven 18,000 miles/yr?