Question

Suppose it costs $30,000 to purchase a new car. The annual operating cost and resale value of a used car are shown in the file P05_60.xlsx. Assume that you presently have a new car. Determine a replacement policy that minimizes your net costs of owning and operating a car for the next six years.

Purchasing and reselling cars
Input data
Age of car	Resale value	Op Cost
1	$23,000	$600
2	$18,000	$1,000
3	$15,000	$1,600
4	$10,000	$2,400
5	$5,000	$3,200
6	$3,000	$4,400

Answer 1

Hey!

Answer :

In the replacement business,

• The car resale value is decreasing year by year
• The car operating cost is increaisng year by year.
• Thus for the business of relacement car, the business will get the resale value based on the age of the car, but will also have high operating cost based on the year of service.
• Thus the net value the business will get = Resale value - Operating Cost
• So the replacement policy will be made in such a way that the cars will be replaced based on age of the car and the net value the business will get from the car. Thus the policy will be as below

Age of Car	Resale Value	Operating Cost	Net Value for Replacement Business = Resale Value - Operating Cost	Reduction Amount	Reduction in %
1	23000	600	22400	7600	25%
2	18000	1000	17000	13000	43%
3	15000	1600	13400	16600	55%
4	10000	2400	7600	22400	75%
5	5000	3200	1800	28200	94%
6	3000	4400	-1400	31400	105%

Hope it helps

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