You currently don't have a car, but rent a car that's parked just outside your house whenever you need one. Your annual expenditure on rental cars is $2,400. You are now considering purchasing a car that would give you the same level of convenience as your current life style. The car costs $26,000 and can be sold for $5,000 after 10 years. You'd purchase the car with money from your savings account which always earns an interest rate of 6%. Assume that all cash flows occur at the end of each year (maybe because you drive much more around Thanksgiving and Christmas). Part 1 (1) Attempt 1/5 for 10 pts. What is the present value of the benefits of owning that car, i.e., saving on rental expenses and selling the car? Correct There are two type of benefits: annual savings on rental cars and the proceeds from selling the car after 10 years. To find the present value of the savings, we can use the formula for an ordinary annuity. To discount the sales proceed, we just use the present value formula. The discount rate should reflect the opportunity cost of the investment, which in this case is leaving the money in the savings account and earning a return of 6%. PVofbenefits=rPMT[1(1+r)N1]+(1+r)NFV PVofbenefits=rPMT[1(1+r)N1]+(1+r)NFV=0.062,400[11.06101]+1.06105,000=20,456 Alternatively, we can use a financial calculator: Entering the four values and then computing the present value gives a PV of benefits of $20,456 (note that the value of the benefits of owning a car is a positive number, even though financial calculators show a negative number). Part 2 Should you buy the car? Attempt 1/5 for 10 pts. No Yes