Step by step If the owner earns 8 interest on her investment

If the owner earns 8% interest on her investments, determine the equivalent annual cost of owning a car with the following costs (EOY = end of year). Initial down payment $2200 Annual payments = $5500, EOY-EOY 4 · Annual insurance $1500, paid EOY . Gas & oil&minor; maintenance $2000, EOY 1, growing $100 annually each year after Replacement tires = $650 at EOY 4 Major maintenance $2400 at EOY 5 Salvage value = $4750 at EOY 6

Solution

Answer:

Calculation of Equivalent Annual Cost	Amount in ($)
S.No	Particulars	Years
0	1	2	3	4	5	6
(a)	Initial Down Payment	2,200
(b)	Annual Payments		5,500	5,500	5,500	5,500
(c)	Annual Insurance		1,500	1,500	1,500	1,500	1,500	1,500
(d)	Minor Maintenance		2000	2100	2200	2300	2400	2500
(e)	Tyre Replacement					650
(f)	Major Maintenance						2400
(g)	Salvage Value							4750
(h)	Total	2,200	9,000	9,100	9,200	9,950	6,300	750
(i)	Discounting Factor@8%	1	0.9259	0.8573	0.7938	0.7350	0.6806	0.6302
(j)	Discounted Cash Flows	2200	8333.10	7801.43	7302.96	7313.25	4287.78	(472.65)
(k)	NPV of cost	36,765.87
(l)	Annuity Factor for 6 years @ 8%.	4.6228
(m)	Equated Annual Cost	$ 7953