You are trying to decide whether you should keep your old used car after graduation, or buy a new one. The car you want costs $25,000, and is expected to have annual operation and maintenance costs of $1,000 per year, with an estimated salvage value of $8,000 seven years from now.

Your current car has a resale value of $5,000 if you sell it today. You estimate that the salvage values will be $3,000 in one year, $2,500 in two years, and $2,000 in three years. Conversely, you expect the operating costs to be $2,000 this year, $2,500 in year two, and $4,000 in year 3 (due to an engine overhaul).

Your minimum acceptable rate of return is 18%, since you are short of money.

a. What is the economic service life of your current used car? In other words, how long should you keep it if you replace it with a similar used car?

b. When you sell the car, should it be replaced by a similar used car, or should you go ahead and buy the new car that you really want? If your analysis shows that your used car should be replaced by a new car, please also analyze whether you should keep your old car for its economic service life, or indicate the best time at which to buy the new car (anytime from immediately to three years from now).