Jimmy Johnson is interested in buying a new Jeep SUV. There are two options avai

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?

**I need to get the calculations as to how each answer is found please. I do not get points if I don't have them.**

Explanation / Answer

a.)Total cost= MSRP + Depreciation + Finance Charge + Insurance + Taxes +Repairs

V-6 SUV= $(30,260+17,337+5,171+7,546+2,179+5,600) =$ 68,093

V-8 SUV = $(44,320+25,531+7,573+8,081+2,937+5,600) = $94,042

b) Fuel cost for V-6 SUV:
Number of Gallons = 15,000/19 = 789.47
Total Cost = Number of Gallons consumed x Cost per gallon => 789.47 x $3.15 = $2,486.84

Fuel cost for V-8 SUV:
Number of Gallons = 15,000/14 = 1,071.43
Total Cost = Number of Gallons consumed x Cost per gallon => 1,071.43 x $3.15 = $3,375

c) Marginal Fuel cost for V-8 = $3,375 - $2,486.84 = $888.16

d) Marginal cost of purchasing the larger SUV V8 = MSRP of V8 – MSRP of V6
=> $44,320 - $30,260 = $14,060

e) Total marginal cost for V-8 = Total cost of V8 – Total cost of V6
=> $94,042 - $68,093 = $25,949
The marginal cost calculated by Jimmy is the marginal cost of purchasing, which does not incorporate other costs associated with V8 over the 5 years period. While the total marginal cost tells about the actual difference.

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