Question

Consider following situation, which involves two options. Determine which option is less expensive. Are there unstated factors that might affect your decision?
You currently drive 325 miles per week in a car that gets 14 miles per gallon of gas. You are considering buying a new fuel-efficient car for S16,000 (after trade-in on your current car that gets 47 miles per gallon
premiums for the new and old car are $1000 and $600 per year, respectively. You anticipate spending $1500 per year on repairs for the old car and having no repairs on the new car. Assume gas costs $3.50 pen
ive-year period, is it less expensive to keep your old car or buy the new car?
a five-year period, the cost of the old car iss) and the cost of the new car issThus, over a five-year period, it is less expensive to
and to the nearest dollar as needed

Answer 1

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Answer:

  it is less expensive to purchase a new car

Step-by-step explanation:

The expected cost of gas, insurance, and repairs for the old car are ...

  Total miles in 5 years = (325 mi/wk)(52 wk/yr)(5 yr) = 84,500 mi

Old car

  Gas cost in 5 years = (84,500 mi)/(14 mi/gal)($3.50/gal) = $21,125

  Insurance cost in 5 years = (5 yr)($600/yr) = $3,000

  Repair cost in 5 years = ($1500/yr)(5 yr) = $7,500

  Total operating cost in 5 years = $21125 +3000 +7500 = $31,625

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New Car

  Gas cost in 5 years = (84,500 mi)/(47 mi/gal)($3.50/gal) ≈ $6,293

  Insurance cost in 5 years = (5 yr)($1000/yr) = $5,000

  Repair cost in 5 years = (0)(5 yr) = 0

  Total operating cost in 5 years = $6293 +5000 = 11,293

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Difference in operating costs is $31,625 -11,293 = $20,332.

It is less expensive to purchase a new car for any price less than $20,300. If the new car costs only $16,000, it is the less-expensive option.

Purchase of a new car is the least-expensive option.

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Additional comments

The cost of financing, annual license fees, and resale value of the new car may also come into play. In addition, the relative non-economic values of consumption of new materials, adding old materials to the scrap heap, and environmental pollution may figure in the decision. While the car dealer may pay for maintenance costs of a new car, it seems likely that at least one set of tires will be required in 5 years (85000 miles). (Assuming wheel alignment is not an issue for tire wear, that cost may balance out for the two cars.)