Jimmy Johnson is interested in buying a new Jeep SUV. There are two options avai
ID: 2716017 • Letter: J
Question
Jimmy Johnson is interested in buying a new Jeep SUV. There are two options available, a V-6 model and a V-8 model. Whichever model he chooses, he plans to drive it for a period of 5 years and then sell it. Assume that the trade-in value of the two vehicles at the end of the 5-year ownership period will be identical. There are definite differences between the two models, and Jimmy needs to make a financial comparison. The manufacturer's suggested retail price (MSRP) of the V-6 and V-8 are $30,260 and $44,320, respectively. Jimmy believes the difference of $14,060 to be the marginal cost difference between the two vehicles.
However, there is much more data available, and you suggest to Jimmy that his analysis may be too simple and will lead him to a poor financial decision. Assume that the prevailing discount rate for both vehicles is 5.5% annually. Other pertinent information on this purchase is shown in the following table:
a. Calculate the total "true" cost for each vehicle over the 5-year ownership period.
b. Calculate the total fuel cost for each vehicle over the 5-year ownership period.
c. What is the marginal fuel cost from purchasing the larger V-8 SUV?
d. What is the marginal cost of purchasing the larger and more expensive V-8 SUV?
e. What is the total marginal cost associated with purchasing the V-8 SUV? How does this figure compare with the $14,060 that Jimmycalculated?
Explanation / Answer
the total "true" cost for each vehicle over the 5-year ownership period
v-6 v-8
Depreciation 17337 25531
finance charges 5171 7573
Insurance 7546 8081
Taxes and fees 2179 2937
Maintenance/fees 5600 5600
Total cost 37833 49722
the total fuel cost for each vehicle over the 5-year ownership period.=
total fuel volume (v-6) = 15000/19 = 789.47 gallons
(v-8) = 15000/14 = 1071.43 gallons
Cost(v6) = 789.47 * 3.15 = 2486.84
Cost(v8) = 1071.43* 3.15 = 3375
the marginal fuel cost from purchasing the larger V-8 SU= 3375-2486.84 = 888.1645
the marginal cost of purchasing the larger and more expensive V-8 SUV = 49722-37833 = 11889
the total marginal cost associated with purchasing the V-8 SUV = 11889+888.1645 = 12777.16
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.