Question

John is considering a purchase of a new Toyota that costs $25,000 at a local dealership. John estimates the annual cost of maintenance, registration, insurance, and gas to be about $1,000. After extensive internet research, John estimates that he can sell his Toyota in three years for $10,000. What is John's estimated cost of owning and driving the car for three years? Please choose the correct answer from the following choices, and then select the submit answer button. Answer choices
A) $25,000 3 x $1,000 + $25,000 = $28,000
B) 3 x $1,000 + $25,000 - $10,000 = $18,000
C) $25,000 - $10,000 = $15,000

Answer 1

Answer:

The correct answer is B) 3 x $1,000 + $25,000 - $10,000 = $18,000

Explanation:

John's estimated cost of owning and driving the car for three years is calculated with three elements.  

• Initial investment $25,000
• Cost of maintenance $1,000 each year
• Savage value  $10,000

We add  Initial investment with Cost of maintenance,  Savage value  must be discounted because we recover that money at the end of the 3 years.  

So,

Cost of owning and driving the car= Initial investment + Cost of maintenance-Savage value

Cost=$25,000+ 3 x $1,000 - $10,000 = $18,000