Suppose you are thinking about buying a car. The market price of the car (including all associated taxes and fees) is $18,200 which you will pay for in cash if you buy the car. You anticipate that you will receive $3,000 (above and beyond any costs associated with running and maintaining the car) worth of services from the car each year for the next eight years, after which time the car will be scrapped and will have no scrap value. If the interest rate is 6%, determine if the present value of the car is more than, less than, or equal to the market value of the car and specify whether or not it makes economic sense to purchase this car. Does the interest rate need to rise or fall in order for you to reach the opposite conclusion about buying the car? Explain your answer and support it using present value calculations.

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The Answer of Suppose you are thinking about buying a car. The market price of the car (including all associated taxes and fees) is $18,200 which you will pay for in cash if you buy the car. You anticipate that you will receive $3,000 (above and beyond any costs associated with running and maintaining the car) worth of services from the car each year for the next eight years, after which time the car will be scrapped and will have no scrap value. If the interest rate is 6%, determine if the present value of the car is more than, less than, or equal to the market value of the car and specify whether or not it makes economic sense to purchase this car. Does the interest rate need to rise or fall in order for you to reach the opposite conclusion about buying the car? Explain your answer and support it using present value calculations.

Suppose You Are Thinking About Buying a Car