You are considering buying a new car, because you think it will
save you money. Your think your old car will cost $2,200 in gas
and maintenance next year (Year 1), and you expect that to
increase by 6% every year until the end of Year 10. A new car will
cost you $16,500 now (Year 0). You think it will cost $500 in
gas and maintenance next year (Year 1), and you expect that to
increase by 4% every year until the end of Year 10. You need to
decide if the new car is worth the investment. Assume an annual
interest rate of 5% a. What is the equivalent present value of the
maintenance costs of the old car? b. What is the equivalent
present value of the maintenance costs of the new car? c. Is the
new car worth the investment?
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