home / study / business / finance / questions and answers / Jimmy Johnson Is Interested In Buying A New Jeep ... Question: Jimmy Johnson is interested in buying a new Jeep S... Bookmark 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 55 years and then sell it. Assume that the trade-in value of the two vehicales at the end of the 55-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 $30,210 and $44,020, respectively. Jimmy believes the difference of 13,810 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 5.6% annually. Other pertinent information on this purchase is shown in the following table:

a.Calculate the total "true" cost for each vehicle over the

55-year

ownership period.

b.Calculate the total fuel cost for each vehicle over the

55-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

$13,810

that Jimmy calculated?

V-6

V-8

				+
				+

MSRP

$30,210

$44,020

Engine (liters)

3.73.7

5.75.7

Cylinders

6

8

Depreciation over 5 years

$17,308

$25,358

Finance charges over entire 5-year period

$5,259$

7,664

Insurance over 5 years

$7,534

$8,026

Taxes and fees over 5 years

$2,175

$2,917

Maintenance/repairs over 5 years

$5,900

$5,900

Average miles per gallon

19

14

Ownership period in years

55

55

Miles driven per year over 5 years

12,000

12,000

Cost per gallon of gas over 5-year ownership

$3.43

$3.43