Suppose that you have an old car that is a real gas guzzler. It is 10 years old and could be sold to a local dealer for $400 cash. The annual maintenance costs will average $800 per year into the foreseeable future, and the car averages only 10 miles per gallon. Gasoline costs $3.50 per gallon, and you drive 15 000 miles per year.

You now have an opportunity to replace the old car with a better one that costs $8000. If you buy it, you will pay cash. Because of a two-year warranty, the maintenance costs are expected to be negligible. This car averages 30 miles per gallon.

Should you keep the old car or replace it? Utilize a two-year comparison period and assume that the new car can be sold for $5000 at the end of year two. Ignore that effect of income taxes and let your MARR be 15%. State any other assumptions made.