Finance - Time value of Money problem

1. Time value of Money problem.

Use present value to determine how much financial difference there is between

the following two car buying strategies. Assume both buyers purchase cars immediately and then follow their respective car buying strategies. The analysis ends in twenty years with both buyers purchasing new cars. Assume money has a value of 12% for both buyers.

BUYER ONE

Purchases a new car every two years.

The cost of the car purchased at the start of the twenty year analysis depends on the first letter of your last name:

A-F $20,000

G-M $30,000

N-R $40,000

S-Z $50,000

The cost of a new car increases 3% every year.

The buyer always purchases the same type car.

There are no maintenance costs associated with this buyer’s cars. They are traded in before they have maintenance costs.

The buyer gets a trade in worth 2/3 of the purchase price of the car.

BUYER TWO

Purchases a new car every ten years.

Buys exactly the same type of car as Buyer One.

The buyer receives one tenth of the purchase price as a trade-in.

Maintenance costs are incurred:

Year one: none

Year two: none

Year three: 1% of the purchase price

Year four: 2%

Year five: 3%

Year six: 4%

Year seven: 5%

Year eight: 6%

Year nine: 7% of the purchase price

Year ten: no expenditure, the car is traded in before yearly maintenance.