Problem 6 You are considering buying a new car with a part of your student loan
ID: 2678845 • Letter: P
Question
Problem 6You are considering buying a new car with a part of your student loan dollars as you really
do not need the extra cash now. You have two alternatives with the following cost
structures.
Speedy Turbo
Initial cost = $20,000 Initial cost = $18,000
Annual operating cost = $8,000 Annual operating cost = $6,000
Useful life = 5 years Useful life = 4 years
Salvage = $2,000 Salvage = $1,500
You want to evaluate these using only economic criteria. Ignore the impact of taxes and
you will pay cash for the car.
a. Which criterion should you use and why? What are you assuming about implementing
the projects when you use this criterion?
b. Given that MARR = 10%, which alternative should you choose?
c. Assume that MARR is 10%. If you can get a car loan at 8% per year, would you take the
loan or use your cash. Economic arguments only here.
Explanation / Answer
cash flow statement need to be used so that the money from our pocket can be checked wheather in or out and the advantages economic criteria can be followed it is better to use our cash so as to pLAY SAFE SIDE AS PER THE ROOL OF ACCOUNTS