You are considering two options. One is an electric engine powered car, and it w

Question

You are considering two options. One is an electric engine powered car, and it would take $45,000 to purchase the car. Besides, you need to change battery every 6 year. The cost of new battery is $6,000. The other is a gasoline engine car, which cost $20,000 initially. The annual maintenance cost for gasoline engine car is $3,000, and the fuel cost per mile is $0.12. On the other hand, it cost $0.04/mile for electric powered car, and annual maintenance cost is $5000. At 12% interest rate, compounded monthly, and useful life of $5,000 for electric car (without buying new battery at the end of year 12), and $3,000 for gasoline car,

a) Calculate the annual total cost of ownership,

b) Which car to buy? Why?

Explanation / Answer

a)

We will be calculating the cost of two options available and then compare those with one another.

I) Electric Power Engine

II) Gasoline Engine

Interest rate of 12% compounded monthly. But the calculation is done on annual basis because on monthly basis he calculations are much deep. If you you want you can do it.

Working Note (WN)

1) Cost of new battery:- The cost of new battery will not considered as we have to calcualte the annual cost.

2) Fuel Cost per mile:- In the absence of information we will assume that the car has run upto 10,000 miles for both the options.

Capital Budgeting Analysis

Option I

PVIF as been calculated by the PVIF Calculators.

Option II

b)

Option II is better. The annual cost of ownership is less in this case.

Thus, gasoline engine should be brought for the car.

Particulars Option I Option II $ $ Initial Cost of Purchase 45,000 20,000 In between Cash Flows: Cost of new battery in year 6 (WN1) 6,000 Annual Cost of maintenance 5,000 3,000 Fuel Cost per mile (WN2) 400 1,200 Total of maintennce cost and fuel cost 5,400 4,200

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