Suppose you are buying a used car. Alternative A is an American buit compact. It has an initial cost of $8900 and operating costs of $0.09/km, excluding depreciation.
From re-sale statistics, you estimate the American car can be resold at the end of 3 years for $1700.
Alternative B is a foregin-built Fiasco. its initial cost is $8000, the operating cost,also excluding depreciation, is $0.08/km. How low could the resale value of the Fiasco be to provide equally economical transportation?
Assume that you will drive 12,000 km/year and you consider 8% an appropriate interest rate. Re-calculate how low the resale value of the Fiasco should be to provide equally economical transportation for the following situations:
(a) What if the Fiasco os more reliable than expected, so that its operating cost is $0.075/km?
(b) What if you drive only 9000 km/year? (note: your operating costs are the original values).
(c) What if your interest rate is 6% annually?
(d) What if (a),(b) and (c) happen simultaneously? (note: this means the operating costs for Fiasco is $0.075/km, you drive only 9000 km/year and your interest rate is 6% annually).