Question: Assume you are looking at the decision of buying a new or used car. The new car costs $15,000 and the used car $5,500 and it has 75,000 miles. You have $5,500 in cash, but anything more has to be borrowed at 10% interest rate. For the new car over 5 years it would mean $201.85 per month. For the new car the first year maintenance is expected at $100, years 2 and 3 at $300 each, and no cost for years 4 and 5. For the used car you are estimating a maintenance cost of 5 cents per mile for every mile driven and you expect fifteen thousand miles of driving per year.
1. How would the business model change if you're told that at the end of the five year period the new car will be worth $7,000 and the used car $2,500? (Incorporate the salvage value into the decision model.)
2. How would you change the business model if you learn that the new car can come from two different factories, one of which produces quality cars with maintenance costs as given above while the other, because of poor quality, could have additional maintenance costs of $1000 not covered by warranty? (Consider a probabilistic view of the decision model.)