(Table: Car Costs) The table shows the initial cost outlays of two versions of the Ford Escape and their estimated annualfuel costs. Stu is not sure whether he wants the hybrid or standard model. Although more expensive, the hybrid model hasbetter gas mileage and would save $890 in gas per year. Assume both cars are worthless after six years. At a 7% interestrate, what should Stu do?YearCosts if Hybrid Bought Costs if Standard Bought-$27,000-2,000$22,500-2,890-2,890-2,890-2,890-2,890-2,8902.-2,000-2,000-2,000-2,000346-2,000Buy the standard model, since the net present value of the total cost of the standard is more than that of the hybrid.O Buy the standard, since the net present value of the total cost of the standard is less than that of the hybrid.OBuy the hybrid, since the net present value of the total cost of the hybrid is less than that of the standard.Buy either model, since the net present value of the cost difference between the hybrid and the standard model is zero.

NPV is the difference between Present Value of cash Inflows and Initial Investment. Project with…

(Table: Car Costs) The table shows the initial cost outlays of two versions of the Ford Escape and their estimated annual fuel costs. Stu is not sure whether he wants the hybrid or standard model. Although more expensive, the hybrid model has better gas mileage and would save $890 in gas per year. Assume both cars are worthless after six years. At a 7% interest rate, what should Stu do? Year Costs if Hybrid Bought Costs if Standard Bought -$27,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -$22,500 -2,890 2,890 -2,890 -2,890 -2,890 -2,890 1. 2. 3 4 6. Buy the standard model, since the net present value of the total cost of the standard is more than that of the hybrid. O Buy the standard, since the net present value of the total cost of the standard is less than that of the hybrid. O Buy the hybrid, since the net present value of the total cost of the hybrid is less than that of the standard. Buy either model, since the net present value of the cost difference between the hybrid and the standard model is zero.

(Table: Car Costs) The table shows the initial cost outlays of two versions of the Ford Escape and their estimated annual fuel costs. Stu is not sure whether he wants the hybrid or standard model. Although more expensive, the hybrid model has better gas mileage and would save $890 in gas per year. Assume both cars are worthless after six years. At a 7% interest rate, what should Stu do? Year Costs if Hybrid Bought Costs if Standard Bought -$27,000 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000 -$22,500 -2,890 2,890 -2,890 -2,890 -2,890 -2,890 1. 2. 3 4 6. Buy the standard model, since the net present value of the total cost of the standard is more than that of the hybrid. O Buy the standard, since the net present value of the total cost of the standard is less than that of the hybrid. O Buy the hybrid, since the net present value of the total cost of the hybrid is less than that of the standard. Buy either model, since the net present value of the cost difference between the hybrid and the standard model is zero.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 13P

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