My friend drives a 2010 Nissan Altima with ? 105,500 miles. Assuming he could dr

Question

My friend drives a 2010 Nissan Altima with ? 105,500 miles. Assuming he could drive this car for up to 5 more years and then sell, calculate the equivalent uniform annual cost of ownership over the next 5 years

1. Estimate 6 costs of ownership over the next 5 years. He knows his car is aging, so at least two of your cash flows need to be gradient cash flows. Explain each of your estimates (e.g. if you estimate a salvage value, explain why). There are many sources of information about costs for cars (library, internet, local mechanics,. . . ). The more specific your information is to this car, the better.

2. Compute his EUAC, showing work.

3. Now perform a sensitivity analysis by considering if one of the factors you have estimated was either 20% higher than you estimated or 20% lower than you estimated. How will this affect your EUAC.

4. Identify one replacement options and calculate the same set of costs of ownership for that car.

5. Determine if and when you would recommend him to replace his car.

Explanation / Answer

Solution for general assignment : Assumed interest rate as 15% as there is no mention.

EUAC = 105,500 ( A/P, 15% 5 )

= 105,500 ( 0.2983 )

= 31470.65

Specific instructions : I would like to take taxes, salvage value, depreciation, insurance, maintenance, rent.

Taxes : Taxes will be paid when ever we incur income and when we acquire asset we will get income . Considering an amount of$2000 towards taxes.

Salvage value : estimated resale value at the end of the useful life. Considering an amount of $ 5,000 towards salvage value.

Depreciation : reducing the value of an asset. For every asset for every year it will be deprecated. Depreciation of $ 5,000 for every year.

Insurance : insurance will be taking on the asset. Insurance of $800 for every year.

Maintenance : For every asset there will be some maintenance costs that will incur. Maintenance of $600

Rent : For an asset to keep it we require some space for which we will pay rent. Rent of $3,000 for every year.

EUAC = 105,000( A/P, 15%,5 )-2000(A/P, 15%,5 )-5000(A/P, 15%, 5)-5000(A/P,15% ,5 )-800( A/P, 15%, 5)-600(A/P, 15%, 5)-3000( A/P,15%,5)

=105000(0.2983)-2000(0.2983)-5000(0.2983)-5000(0.2983)-800(0.2983)-600(0.2983)- 3000(0.2983)

= 31,470.65 - 596.6 - 1491.5 - 1491.5 - 238.64 - 178.98 - 894.9

= 26,578.53

It is not a wise statement and it is not correct to keep costs it will effect (31,470.65 - 26,578.53) = 4,892.12

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