You currently dont have a car but rent a car thats parked...

You currently don't have a car, but rent a car that's parked just outside your house whenever you need one. Your annual expenditure on rental cars is \$2,300. You are now considering purchasing a car that would give you the same level of convenience as your current life style. The car costs \$26,000 and can be sold for \$5,000 after 10 years. You'd purchase the car with money from your savings account which always earns an interest rate of 6\%. Assume that all cash flows occur at the end of each year (maybe because you drive much more around Thanksgiving and Christmas).

Transcript

00:01 Okay, so for this problem, it says you are currently drive 200 miles per week in a car that gets 17 miles per gallon of gas.

00:15 You are considering to purchase a new fuel efficient car for $14 ,000 after trade -in on your current car.

00:25 That gets 40 miles per gallon.

00:28 So this gets 40 miles per gallon.

00:35 Insurance premiums for the new and old car are 700.

00:43 So this is $700 a year for the new car for insurance.

00:49 And for the old car, it's $400 per year for the old insurance.

00:57 Respectively.

01:00 You anticipate spending $1 ,300 a year, $1 ,300 a year, on repairs for the old car, and having no repairs from the new car.

01:15 Assuming gas costs, so we have gas costs $2 .25 per gallon.

01:26 Over a five -year period, is it less expensive to keep your old car or buy the new car? or buy the new.

01:31 New car.

01:32 Show all work to determine the conclusion.

01:34 Clearly explain the answer and any assumptions your team makes.

01:39 Okay, so let's figure out the cost per year.

01:45 So you go 200 miles per week in the car and you get 17 miles per gallon.

01:52 So 17 miles per gallon and it is, so i need to figure out how many gallons that i'm going to get so 200 divided by 17 is $11 and 76 i'm sorry 11 .76 gallons and that is at $2 .25 per gallon so times $2 .25 so it's going to be $26 .47 per week to fill up that it's $1 ,300 ,000.

02:41 It's $1 ,300 ,000.

02:41 In repairs and $400 for the insurance.

02:49 Then it says, so you're considering approaching a new fuel efficient vehicle after trade on your car.

02:56 This gets 40 miles to the gallon.

03:00 So 200 divided by 40 is five.

03:05 So five times $2 .25 is $11.

03:20 And 25 cents a week in gas and it's $700 for the new insurance.

03:35 So that is, so that's per week and then $700 for the new insurance.

03:44 Now, if i need to figure out over a five -year period, so i start off with the $14 ,000, okay? then $700 a year for the new insurance.

03:56 So i have $14 ,000.

03:58 And then i have to do $700 times $3 ,500.

04:04 And i need to figure out there's 52 weeks in a year...