Suppose you are considering purchasing a new minivan You and

Suppose you are considering purchasing a new minivan. You and your spouse have narrowed it down to two choices:

            a. 2015 Dodge Grand Caravan SXT

                        Initial Price: $27,300

                        Annual O&M: $4,456

                        Expected trade-in value after 5 years: $9,100

            b. 2015 Honda Odyssey Touring

                        Initial Price: $38,795

                        Annual O&M: $3,050

                        Expected trade-in value after 5 years: $18,544

If you intend to keep your new vehicle for 5 years, then trade it in, determine the net present value (NPV) of each alternative, assuming a discount rate of 4.0%. Which alternative is the better buy, using the NPV criterion?

Solution

Prepare comparative cost of investment at present value as follows:

As expenditure as of now at present value is less for a)

Dodge Grand Caravan is suitale.