Question

You plan to purchase a car for $28,000. Its market value will decrease by 20% per year. You have determined that the IRS-allowed mileage reimbursement rate for business travel is about right for fuel and maintenance at $0.485 per mile in the 1st year. You anticipate that it will go up at a rate of 10% each year, with the price of oil rising, influencing gasoline, oils, greases, tires, and so on. You normally drive 15,000 miles per year. Your MARR is 9%.

Required:
What is the optimum replacement interval for the car?

Answer 1

The optimal replacement interval for the car = Year 6

Step-by-step explanation:

Given that,

Car price = $ 28,000

Decline per year = 20%

Per mile Reimbursement = 0.485

Drive per year = 15,000

Rise in cost per year = 10%

MARR = 9%

Now,

For the optimum replacement interval , calculate the equivalent uniform annual cost(EUAC)

The year in which EUAC is minimum, that year is called the year of replacement.

Firstly calculate the marginal cost-

from the EUAC ,

Minimum at year 6 and the value is $ 14,400.41

So,

The optimal replacement interval for the car = Year 6