Word problem!

Expert replies

Ahmed MS: Senior | Next Rank: 100 Posts; Posts: 74; Joined: Wed Apr 06, 2011 8:35 pmFollowed by: 1 member

by Ahmed MS » Thu Feb 07, 2013 9:14 pm

Rondo is in the market for a new car. He has narrowed his search down to 2 models. Model A costs $32,000 and Model B costs $28,000. With both cars he plans to pay cash and own them for 4 years before trading in for a new car. His research indicates that the trade in value for Model A after 4 years is 60% of the initial purchase price, while the trade in value for Model B is 45%. The interest rate is 5%. For simplicity assume that operating and maintenance costs for the models are identical. Which model is the better decision and how much "cheaper" is it than the alternative?

Source: Beat The GMAT — Problem Solving | Thu Feb 07, 2013 9:14 pm

Jim@StratusPrep: MBA Admissions Consultant; Posts: 2278; Joined: Fri Nov 11, 2011 7:51 amFollowed by: 266 members; Location: New York; Thanked: 660 times; GMAT Score:770

by Jim@StratusPrep » Fri Feb 08, 2013 5:19 am

Honestly this is not a GMAT problem and you cannot answer the problem precisely without knowing how much the payments will be. The smaller the payments, the more interest you will pay, changing the dollar amount spent.

Basically, focus more on GMAT stuff. You can answer questions such as this in your corporate finance class.

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