Assume you need to buy a new vehicle The junker that you paid s5,000 for two yea

Question

Assume you need to buy a new vehicle The junker that you paid s5,000 for two years ago has a current value of $1,500 You have narrowed the choice down to a used 2008 Jeep Cherokee with a blue book value of $8,000 and a new Hyundai Elantra with a sticker price of $12,995 You plan to drive either vehicle for at least five more years Required Indicate whether each of the following factors would be relevant or irrelevant to your decision: (a) The $5.000 you paid for your junker two years ago (b) The $1.500 your vehicle is worth today (c) The blue book value of the Jeep Cherokee (d) The sticker price of the Hyundai Elantra (e) The difference in fuel economy for the Jeep and the Hyundai (T) The cost of on-campus parking (g) The difference in insurance cost for the Jeep and the Hyundai (h) The difference in resale value five years from now for the Jeep and the Hyundai 0) The fact that the Hyundai comes with a warranty while the Jeep does not

Explanation / Answer

(a) Irrelevant $ 5000 already paid is sunk cost (b) Irrelevant Since continue with Junker is not a choice. Hence how much we get from its sale is not relevant. (c) relevant Blue book value implies net cash Investment after exchange of old junker. (d) relevant Cash Investment with other alternative. (e) relevant Annual savings from Hynudai is mainly dependent on fuel economy. (f) Irrelevant Remains same, wether you go with used jeep or Hyundai. (g) relevant such difference effects annual operating cash flows (h) relevant Last year cash flow is dependent on resale value. (i) relevant Maintaince cost difference araises hence effects cashflows.

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