Suppose you are planning to buy a new car to last you the next 5 years. You have
ID: 2744110 • Letter: S
Question
Suppose you are planning to buy a new car to last you the next 5 years. You have narrowed down the choices to a traditional car and a hybrid. The following table summarizes the characteristics of each car:
Car
Hybrid
Traditional
Purchase Cost
35,000
22,000
Salvage Value (in year 5)
10,000
7,000
Miles per Gallon
50
30
Cost of fuel (per Gallon)
4.00
4.00
What’s the minimum average number of miles per year that you have to drive in order for the Hybrid to be more economical?
a.) Ignore inflation and assume MARR=0.
b.) Ignore inflation. Now assume MARR=7%.
Car
Hybrid
Traditional
Purchase Cost
35,000
22,000
Salvage Value (in year 5)
10,000
7,000
Miles per Gallon
50
30
Cost of fuel (per Gallon)
4.00
4.00
Explanation / Answer
Fuel cost = (35000 / 50) * 4 = $ 2800
Purchase cost = 35000
BEP = (35000 + 2800) / 50
= 756 miles
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