You are the owner of an old car, its paint is peeling off but the car is still in good shape and runs smoothly. You now consider two options: 1) give your car a new paint job and keep it for another two years, or 2) buy a new car. You evaluate both options based on an average use of 12,000 Miles per year. Additional parameters for each option are: Option 1: the new paint job will cost you $ 2,500, your car will need regular maintenance for the next two years which will cost $ 1000/yc, and the car gas consumption is 25 MPG (Miles Per Gallon). After two years you will sell the car for a salvage value of $ 5,000 and use the money as down payment for a new car which will cost $ 30,000, you will finance the balance through the car dealer at a yearly interest of 7.5% with yearly payments for 5 years (end of year payments). You will keep this new car for ten years, it will require normal maintenance averaging $ 500/yr, and its gas consumption will be 35 MPG, the gas cost is considered $ 3.50 per gallon. At the end of the ten years you will sell the car for $ 4,000. To simplify the analysis, you may assume that your cost of capital for the first two years running the old re-painted car is the same as the cost of capital charged by the car dealer of the new car. Option 2: you sell the old car without new paint for a salvage value of $ 3,500 and use the money as down payment for a new electric car which will cost $ 40,000, you will finance the balance through the car dealer at a yearly interest of 6.5% with yearly payments for 5 years. You will keep this new car for 12 years, it will require normal maintenance averaging $ 500/yr, and its power consumption will be 5 Miles per kWh, the electric energy rate is $ 0.12 per kWh. At the end of the twelve years you will sell the car for $5,000. QUESTION # 1 - Use present value of cost analysis to decide which option is best, and confirm the result using uniform equivalent annual cost QUESTION #2 - At what gasoline price per gallon would the decision change? You are the owner of an old car, its paint is peeling off but the car is still in good shape and runs smoothly. You now consider two options: 1) give your car a new paint job and keep it for another two years, or 2) buy a new car. You evaluate both options based on an average use of 12,000 Miles per year. Additional parameters for each option are: Option 1: the new paint job will cost you $ 2,500, your car will need regular maintenance for the next two years which will cost $ 1000/yc, and the car gas consumption is 25 MPG (Miles Per Gallon). After two years you will sell the car for a salvage value of $ 5,000 and use the money as down payment for a new car which will cost $ 30,000, you will finance the balance through the car dealer at a yearly interest of 7.5% with yearly payments for 5 years (end of year payments). You will keep this new car for ten years, it will require normal maintenance averaging $ 500/yr, and its gas consumption will be 35 MPG, the gas cost is considered $ 3.50 per gallon. At the end of the ten years you will sell the car for $ 4,000. To simplify the analysis, you may assume that your cost of capital for the first two years running the old re-painted car is the same as the cost of capital charged by the car dealer of the new car. Option 2: you sell the old car without new paint for a salvage value of $ 3,500 and use the money as down payment for a new electric car which will cost $ 40,000, you will finance the balance through the car dealer at a yearly interest of 6.5% with yearly payments for 5 years. You will keep this new car for 12 years, it will require normal maintenance averaging $ 500/yr, and its power consumption will be 5 Miles per kWh, the electric energy rate is $ 0.12 per kWh. At the end of the twelve years you will sell the car for $5,000. QUESTION # 1 - Use present value of cost analysis to decide which option is best, and confirm the result using uniform equivalent annual cost QUESTION #2 - At what gasoline price per gallon would the decision change
