Warner Cable Company needs to replace 5 vehicles in its 50 vehicle fleet. Warner
ID: 2761554 • Letter: W
Question
Warner Cable Company needs to replace 5 vehicles in its 50 vehicle fleet. Warner is considering two different types of vehicles: a higher cost, higher gas mileage vehicle (Vehicle Type HC) or a lower cost, lower mileage vehicle (Vehicle Type LC). The maintenance costs for the vehicles are similar. The cost for Vehicle HC is $35,000 and the cost for Vehicle LC is $28,000. Vehicle HC gets an average of 43 miles per gallon, and Vehicle LC gets an average of 25 miles per gallon. Warner plans to finance the purchase over a 4 year period, and the vehicles should last 8 years. The resale value of the vehicles after 8 years is estimated to be 10% of the original purchase price. Assume the average cost per gallon of gas over the 8 year period is $4.20; also assume that each vehicle is driven the same number of miles over the 8 year period. 1. What is the monthly payment for each type of vehicle (use interest rate of 6%)? 2. What is the total purchase cost for each type of vehicle? 3. What is the estimated fuel cost if each vehicle is driven 5,000 miles annually? 4. What is the estimated fuel cost if each vehicle is driven 30,000 miles annually? 5. Which vehicle type should Warner purchase? Justify your answer. 6. Summarize this scenario.
Explanation / Answer
1. What is the monthly payment for each type of vehicle (use interest rate of 6%)?
A: EMI for Type HC = $35,000 * 6%/12 * (1 + 6%/12)4*12 / [(1 + 6%/12)4*12 - 1]
= $821.98
EMI for Type LC = $28,000 * 6%/12 * (1 + 6%/12)4*12 / [(1 + 6%/12)4*12 - 1]
= $657.58
2. What is the total purchase cost for each type of vehicle?
A: Total purchase cost for Type HC = 48 * $821.98
= $39,455
Total purchase cost for Type LC = 48 * $657.58
= $31,564
3. What is the estimated fuel cost if each vehicle is driven 5,000 miles annually?
A: Fuel cost for Type HC over 8 years = 5,000 / 43 * $4.20 * 8
= $3,906.98 ~ $3,907
Fuel cost for Type LC over 8 years = 5,000 / 25 * $4.20 * 8
= $6,720
4. What is the estimated fuel cost if each vehicle is driven 30,000 miles annually?
A: Fuel cost for Type HC over 8 years = 30,000 / 43 * $4.20 * 8
= $23,441.86 ~ $23,442
Fuel cost for Type LC over 8 years = 30,000 / 25 * $4.20 * 8
= $40,320
5. Which vehicle type should Warner purchase?
A: In case 5,000 miles drien annually, then
Total cost of Type HC = $39,455 + $3,907
= $43,362
Total cost of Type LC = $31,564 + $6,720
= $38,284
In case 30,000 miles drien annually, then
Total cost of Type HC = $39,455 + $23,442
= $62,897
Total cost of Type LC = $31,564 + $40,320
= $71,884
Therefore, if the vehicle is bought for driving 5,000 miles annually then Type LC is better and if 30,000 miles is drivn annually then Type HC is better. The basisc comparison is in terms of total cost over the period of 8 years.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.