Reference no: EM132939763

Question - The Biden administration is considering ways to reduce the carbon footprint of the U.S. economy. One proposal on the table is a government program to provide low-interest financing for people who buy fully electric vehicles. Assume the following:

Under the government program, buyers of electric cars would be able to get financing at an APR of 1 percent on 5-year loans with monthly payments and monthly compounding. The APR on 5-year car loans with monthly compounding and payments available from banks is 5 percent (for any type of car). Car loans have fixed monthly payments.

Ms. Lee is considering buying an electric car costing $42,000 (which would qualify for the government program) or a regular (gas fueled) car costing $35,000. She would need to finance the car purchased and would drive it for five years and then sell it. Assume the resale value would be $10,000 for each car at that point.

Ms. Lee can invest at an APR of 5 percent with monthly compounding.

Ms. Lee expects that operating costs would be $100 higher for the gas-fueled car than for the electric car in the first month. Future (additional) operating costs on the gas fueled car would grow at 0.25 percent per month. Assume operating costs occur at the end of each month. In present value terms, how much more expensive would the gas fueled car be to operate?