Question

You have been saving for a car for a while and have $2000 saved. You come across two different options for a car.

i) Option A: Buy an older cheaper car for $2000 but with a higher risk of repairs costing $250 per month.
ii) Option B: Buy a newer car for $8000 with a $2000 down payment, no repairs for the first three years, and a loan at 8% for a 3-year term.

a) Which option would you choose and why?
b) What is the total cost of each vehicle over time?

Answer 1

I would choose Option B, which involves buying a newer car for $8000 with a $2000 down payment and a loan at 8% for a 3-year term. This option has no repairs for the first three years, and the total cost over time would be $29200.

Step-by-step explanation:

a) I would choose Option B, which involves buying a newer car for $8000 with a $2000 down payment and a loan at 8% for a 3-year term. This option has no repairs for the first three years, and although it requires monthly loan payments, it provides the advantage of driving a newer car with a lower risk of repairs compared to Option A.

b) To calculate the total cost of each vehicle over time, we need to consider the purchase price, repairs, and loan interest. For Option A, the total cost over time would be $2000 (car purchase) + ($250 x 12 months x 3 years) (repairs) = $9500. For Option B, the total cost over time would be $8000 (car purchase) + $2000 (down payment) + (loan interest) = $8000 + $2000 + (0.08 x 3 x $8000) = $8000 + $2000 + $19200 = $29200.