Question

Giancarlo has received an inheritance from his rich uncle and is contemplating the purchase of a Suzuki XL7. In an attempt to make a rational decision, Giancarlo has identified the following cash flow estimates: Negotiated price of new Suzuki XL 7 $24,675 Taxes and fees on a new car purchase $1,732 Proceeds from the trade-in of old car $9,285 Estimated value of the Suzuki XL7 in 5 years $7,285 Estimated value of old car in 5 years $3,572 Estimated annual repair cost on Suzuki XL7 $350 Estimated annual repair cost on old car $925 What would be Giancarlo’s initial investment in the Suzuki XL7?

Answer 1

Giancarlo’s initial investment in the Suzuki XL7 is $17,122

Step-by-step explanation:

The computation of the initial investment is shown below:

= Negotiated price of new Suzuki + Taxes and fees charges on purchase of a new car - proceeds from the old car

= $24,675 + $1,732 - $9,285

= $17,122

The estimated value of the old, new car and the annual repair cost is not relevant for computing the initial investment. Hence, we ignore it and not considered this cost.