Colorado State University Global Campus Buying a New Car Exercise

Option #1:Buying a New Car

Suppose you want to buy a new car and are trying to choose between two models:

Model A: costs $16,500 and its gas mileage is 25 miles per gallon and its insurance is $250 per year.

Model B: costs $24,500 and its gas mileage is 40 miles per gallon and its insurance is $450 per year.

If you drive approximately 40,000 miles per year and the gas costs $3 per gallon:

Find a formula for the total cost of owning Model A where the number of years you own the car is represented by x.

Find a formula for the total cost of owning Model B where the number of years is the independent variable.

Find the total cost for each model for the first five years.

If you plan to keep the car for 4 years, which model is more economical? What about if you plan to keep it for 6 years?

Find the number of years in which the total cost to keep the two cars will be the same.

Identify the number of months where neither car holds a cost of ownership advantage.

What effect would the cost of gas doubling have on cost of ownership? Graph or show hand calculations.

If you can sell either car for 40% of its value at any time, how does the analysis change? Graph or show hand calculations.