Suppose the reader has an old car, which is a gas guzzler. It is 10 years old and could sell for $400 cash to a local dealer. Assume that your MV in two years is zero. For the foreseeable future, annual maintenance expenses will average $800, and the car will get only 10 miles per gallon. Gasoline costs $1.50 per gallon, and the car is used an average of 15,000 miles per year. You now have the opportunity to replace your old car with a better one that costs $8,000. If I bought it, I would pay cash. Maintenance costs are expected to be negligible since it has a two-year warranty. This car averages 30 miles per gallon. Use the IRR method to determine which alternative should be selected. Use a two-year analysis period and assume that the new vehicle can sell for $5,000 at the end of year two. The MARR is 15% per year. Mention any other assumptions you make.
Suppose the reader has an old car, which is a gas guzzler. It is 10 years old and could sell for $400 cash to a local dealer. Assume that your MV in two years is zero. For the foreseeable future, annual maintenance expenses will average $800, and the car will get only 10 miles per gallon. Gasoline costs $1.50 per gallon, and the car is used an average of 15,000 miles per year. You now have the opportunity to replace your old car with a better one that costs $8,000. If I bought it, I would pay cash. Maintenance costs are expected to be negligible since it has a two-year warranty. This car averages 30 miles per gallon. Use the IRR method to determine which alternative should be selected. Use a two-year analysis period and assume that the new vehicle can sell for $5,000 at the end of year two. The MARR is 15% per year. Mention any other assumptions you make.
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