(NPV, EAC) Emma, the CFO of a company, would like to purchase a new car. She intends to replace the car every few years. The annual expected dollar costs of the car are given below:

Also assume:
• All costs are incurred at the end of the year.
• A new car costs $10,000.
• The above figures are expected to remain constant in real value.
• Emma’s annual real cost of capital is 5%.
• You can ignore the effects of taxes in your analysis.
Answer the following questions:

a. How often should Emma replace the car?

b. A leasing company offers Emma the same car under a leasing agreement. What is the highest yearly lease that Emma is willing to pay?

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1 Car cost 2 Cost of capital 3 4 A B D E F 10,000 5% 5 Registration and city taxes 6 Insurance 7 Fuel Repairs 8 (first 3 years are paid by the dealer) 9 Market value of car at the end of the year Year 1 Year 2 Year 3 Year 4 Year 5 100 100 100 100 100 600 500 450 450 450 600 650 700 750 800 0 0 0 500 600 8,500 7,500 6,700 6,000 5,400