A professor of engineering economics owns an older car. In the past 12 months, he bought two new tires for $160, and installed a CD player for $110. He wants to keep the car for 2 more years because he invested money 3 years ago in a 5 year certificate of deposit, which is earmarked to pay for his dream machine, a red European sports car. Today the old car's engine failed. The professor has two alternatives. He can have the engine overhauled at cost of $1800 per year for the most likely have to pay another $800 per year for the next 2 years for kmaintenance. The car will have no salvage value at that time.
Alternatively a colleague noffered kto make the professor a $5000 loan to buy another used car. Hde must pay the loan back in two equal installments of $2500 due at the end of year 1 and year 2, and at the end of the second year he must give the colleague the car. The new used car has an expected annual maintenance cost of $300. If the professor selects this alternative, he can sell his current vehicle to a junkyard for $1500. Interest is 5%. Using present worth analysisi, which alteernative should he select and why?