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(Solved): Jim's1998 Minivan Only Averages 20 Miles Per Gallon. He Has Found A Some What Newer Vehicle That Av ...

Jim's1998 minivan only averages 20 miles per gallon. He has found a some what
newer vehicle that averages 26 mpg. He can sell his current minivan for $2800 and purchase
the newer vehicle for $4,000. A) Assuming cost of gasoline at $4.00 per gallon, how many
miles per year must Jim drive if he wants to recover his investment in three years? Assume an
interest rate of 6%, zero salvage value for either vehicle after three years, and identical
maintenance cost. B) Considering that Jim drives about 10,000 miles per year and if gas prices
drop by 10%, what should Jim do?

Expert Answer

Incremental cost=C=4000-2800=$1200 Let he dives X miles per year. Incremental saving per year=S=4X/20-4X/26=0.046154X Incremental NPV=-1200+0.046154X*(P
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