Question

A new American graduate is contemplating buying a Japanese, German, or an American car. No

matter the type of car, he plans to buy a new one at the end of 8 years.
Japanese car will cost $30,000 and have a fuel usage of 23 Miles Per gallon (mpg) for the first 2
years, and will decrease by 3% per year thereafter. Repair cost will start at $700 per year, and
increase by 3% per year. At the end of year 8, the car can be sold for $5000. Insurance cost will
be $700 for the first year, increasing by 2% per year thereafter.

Answer 1

Japanese car

Explanation:

Given

problem details in Attachment 1

Find

the most economical car

Solution

The attached spreadsheet shows the costs of repairs, insurance, and gas for each of the cars, using the cost factors described in the problem statement. (Numbers are displayed rounded to dollars.)

Mileage each year is assumed to be 150,000/8 = 18,750.

The "present value" line shows the present (year 0) value of the listed costs. The present value is the sum of values divided by 1.05^(year number). It is calculated using the spreadsheet NPV function.

The green total is the sum of present values to its right and the initial cost. The end value is subtracted after it is discounted by 1.05^8.

The Japanese car has the lowest present value.

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The third attachment is the spreadsheet in Open Office format.