Question 1 A new American graduate is contemplating buying a Japanese, German, or an American car. No matter the type of car, he plans to buy a new one at the end of 8 years. Japanese car will cost $40,000 and have a fuel usage of 23 Miles Per gallon (mpg) for the first 2 years, and will decrease by 3% per year thereafter. Repair cost will start at $700 per year, and increase by 3% per year. At the end of year 8, the car can be sold for $6000. Insurance cost will be $700 for the first year, increasing by 3% per year thereafter. A German car will cost $45,000 and have fuel usage of 21mpg for the first 5 years, and decrease by 1% thereafter to year 8. Repair cost will start at $1000 in year 1 and increase by 4% per year. It will have a salvage value of $7000 at the end of year 8. Insurance cost will be $850 the first year, increasing by 3% per year thereafter. The American car will cost $35,000 and have fuel usage of 20mpg for the first 3 years, and will decrease by 3% per year thereafter. Repair cost will be $750 in year 1, increasing by 4% per year thereafter. Being an American, the graduate will price the pride of owning an American car at $0.4 for every 20 miles driven, increasing by 2% per year. Insurance cost will be $800 per year increasing by 2% per year. The car can be sold for $5500 at the end of year 8. If the graduate anticipates driving 160000 miles by the end of year 8 and the average interest rate is expected to remain at 8% per year, which car is economically affordable based on present worth analysis? Assume fuel cost will be $4 per gallon in year 1 and increase by an average of 3% per year. Show all your workings.
Question 1
A new American graduate is contemplating buying a Japanese, German, or an American car. No matter the type of car, he plans to buy a new one at the end of 8 years.
Japanese car will cost $40,000 and have a fuel usage of 23 Miles Per gallon (mpg) for the first 2 years, and will decrease by 3% per year thereafter. Repair cost will start at $700 per year, and increase by 3% per year. At the end of year 8, the car can be sold for $6000. Insurance cost will be $700 for the first year, increasing by 3% per year thereafter.
A German car will cost $45,000 and have fuel usage of 21mpg for the first 5 years, and decrease by 1% thereafter to year 8. Repair cost will start at $1000 in year 1 and increase by 4% per year. It will have a salvage value of $7000 at the end of year 8. Insurance cost will be $850 the first year, increasing by 3% per year thereafter.
The American car will cost $35,000 and have fuel usage of 20mpg for the first 3 years, and will decrease by 3% per year thereafter. Repair cost will be $750 in year 1, increasing by 4% per year thereafter. Being an American, the graduate will price the pride of owning an American car at $0.4 for every 20 miles driven, increasing by 2% per year. Insurance cost will be $800 per year increasing by 2% per year. The car can be sold for $5500 at the end of year 8.
If the graduate anticipates driving 160000 miles by the end of year 8 and the average interest rate is expected to remain at 8% per year, which car is economically affordable based on present worth analysis? Assume fuel cost will be $4 per gallon in year 1 and increase by an average of 3% per year. Show all your workings.
Question 2
The sales and finance team of a car company is evaluating a new proposed luxury model of its brand that will require an investment of $1Billion in a new machine for car interior decoration. Demand for the company’s car is expected to begin at 100,000 units in year 1, with 10% annual growth thereafter. Production cost will be $40,000 per unit in the first year, and increase by a rate of either 3% or 5% per year as a result of wage increase. Selling price will start at $35,000 and increase by 5% of the production cost. The model will be phased out at the end of year 10. In addition, 0.3%, 2% and 1% of before tax profit per year will be spent on social corporate responsibility, commercial (including promotions) and recalls respectively. Assume taxes will be 30% of yearly profit and that inflation will remain at 0% per year throughout the 10 year of production. Also assume interest rate is expected to be 3% per year in the first 5 years and 5% in the last 5 years.
a. Based on present worth analysis, is the proposed investment profitable if production cost increases by a rate of 3% per year as a result of wage increase?
b. Based on present worth analysis, is the proposed investment profitable if production cost increases by a rate of 5% per year as a result of wage increase?
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