Suppose it costs $10,000 to purchase a new car. The annual operating cost and re
ID: 450382 • Letter: S
Question
Suppose it costs $10,000 to purchase a new car. The annual operating cost and resale value of a used car are shown in the following table. Assuming that one now has a new car, determine a replacement policy that minimizes the net costs of owning and operating a car for six years
Age of Car (Years)
Resale Value ($)
Operating Cost ($)
1
7,000
300 (year 1)
2
6,000
500 (year 2)
3
4,000
800 (year 3)
4
3,000
1,200 (year 4)
5
2,000
1,600 (year 5)
6
1,000
2,200 (year 6)
Age of Car (Years)
Resale Value ($)
Operating Cost ($)
1
7,000
300 (year 1)
2
6,000
500 (year 2)
3
4,000
800 (year 3)
4
3,000
1,200 (year 4)
5
2,000
1,600 (year 5)
6
1,000
2,200 (year 6)
Explanation / Answer
Cost involved each year:
Year 1: 10000-7000+300=3300
Year 2: 7000-6000+500= 1500
Year 3: 6000-4000+800= 2800
Year 4:4000-3000+1200= 2200
Year 5: 2000-1000+1600= 2600
Year 6: 1000+2200= 3200
He can use the car till Year 4 and then get a replacement car.
Replacement car for year 5 and year 6 will cost 3300+1500= 4800
Else would have costed= 2600+3200= 5800