Johnson is trying to decide whether he should keep his presently owned ear or pu

Question

Johnson is trying to decide whether he should keep his presently owned ear or purchase a more environmentally friendly hybrid. A new car will cost $28,000 and have annual operation and maintenance costs of $1000 per year with an $80(K) salvage value in 6 years (which is its estimated economic service life). The presently owned car has a resale value now of $6000; one year from now it will be $4000. two yea now $3000. and 3 years from now$2600. Us operating cost is expected to be $1800 this year with costs increasing by $200 per year. The presently owned car will definitely not be kept longer than more years. Assuming used cars like the one presently owned will always be available, should the presently owned car be sold now, 1 year from now, 2 years from now, or 3 years from now? Use annual worth calculations at i-20% per year and show your work.

Explanation / Answer

New Car Net annual worth=    28000+(1000*3.326)-(8000*0.335) = PV F @20%,6yrs.) 28646 Sold now Net annual worth=    28000+(1000*3.326)-(8000*0.335)-6000 = PV F @20%,6yrs.) 22646 Sold 1 year from now Net annual worth=28000+(1000*3.326)-(8000*0.335)+(1800*0.833)-(4000*0.833)= 26813.4 Sold 2 years from now Net annual worth= 28000+(1000*3.326)-(8000*0.335)+ (1800*0.833)+(2000*0.694)-(3000*0.694)   29451.4 Sold 3 years from now Net annual worth=28000+(1000*3.326)-(8000*0.335)+ (1800*0.833)+(2000*0.694)+(2200*0.579)-(2600*0.579) = 31301.8 Selling now , at the time of purchasing the new car is advisable for its minimum NAW

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