Reference no: EM133159019

Question - Shopping for a new car, you are comparing car C and car H. Car C is comfy, fun to drive and featured in a pop song in the 1970s. Car H has great fuel economy and is known for being reliable.

Car C costs $24,000 upfront and requires a yearly maintenance and gas cost of $2,500 per year. Car C can only last 15 years; at the end of year 15, you can trade-in car C for $1,100.

Car H costs $30,000 upfront (year 0) and requires an annual maintenance and gas cost of $2,000 per year. Car H can last 20 years; at the end of year 20, you can trade-in car H for $1,500.

Required -

1. Assume you are using an annual discount rate of 5%. What's the total cost, in terms of the present value, of owning car C and car H, respectively? Which car is cheaper to own on a per-year basis?

2. Re-do the previous question by assuming a discount rate of 15%. Which car do you prefer now? Provide some intuition.

3. At what discount rate are you indifferent between car C and car H?