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?

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V-6 V-s $30,260 $44,320 Engine (liters) Cylinders Finance charges over entire 5-year period Taxes and fes over 5 years $17,337 $5,171 $7,546 $2,179 $5,600 $25,531 S7,573 $8,081 $2,937 $5,600 14 Maintenance/repairs over 5 years 5 Ownership period in years Miles driven per year over 5 years Cost per gallon of gas over S-year ownership 15,000 S3.15 15,000 $3.15 The finance charges are the difference between the total principal and interest paid over the entire 5-year period less the actual cost of the SUV. Assuming an annual 5.5% discount rate over each of the 5 years and the respective present values of $30,260 for the V-6 and $44,320 for the V-8, the annual annuity payments are $7,086.20 and $10,379.70, respectively. [V- (5 x 57,086.20) $30,260-55,171, and V8: (5 x $10,37970) $44,320 $7,573