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

Question

Johnson is trying to decide whether he should keep his presently owned car 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 $8000 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 years from now $3000, and 3 years from now$2600. Its 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 3 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. (Show every setup, not just given a numerical answer neither using spreadsheet! )

Explanation / Answer

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Wes should replace the equipment at t = 0 . Because equivalnet Annual Cost is low.

Year Initial Investment Years (Life) PVIFA(20%,n) PVIF(20%,n) P.V of Salvage Value P.V of Operating Cost Total P.V of Outflow Annual Outflow 0 22000 6 3.3255 0.3349 2679.2 3325.5 22646.3 6809.893249135 1 24000 7 3.6046 0.2791 2232.8 5104.6 26871.8 7454.863230317 2 25000 8 3.8372 0.2326 1860.8 6892.76 30031.96 7826.529761284 3 25400 9 4.031 0.1938 1550.4 8665 32514.6 8066.13743488

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