\"You are considering two types of automobiles. Model A costs $19,000 and model
ID: 2791596 • Letter: #
Question
"You are considering two types of automobiles. Model A costs $19,000 and model B costs $16,703. Although the two models are essentially the same, after 7 years of use, model A can be sold for $9,500, while model B can be sold for $6,000. Model A commands a better resale value because its styling is popular among young college students. The two automobiles will have the same operating costs. What value of MARR would make you indifferent between the two models? Express your answer as a percentage between 0 and 100."
Explanation / Answer
We form the below equation for the NPV of Model A and Model B and equate the two to calculate the MARR represented by "r"
9500/(1+r)^7 -19,000 = 6000/(1+r)^7 -16,703
(9500-6000)/(1+r)^7 = 19,000-16,703
3,500/(1+r)^7 = 2,297
3500/2297 = (1+r)^7
(1+r) = (3500/2297)^(1/7)
1+r = 1.0620124
r = 0.0620124
r = 6.20% (Rounded to 2 decimals)
So the MARR that would make the two models indifferent is 6.20%
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