Chapter 7 Capital Investment Decision

Capital Investment: Buy new equipment vs. repair old

We often need to make decisions on purchasing new equipment or continuing to repair old equipment. There are many factors beyond cost, but right now we will focus on cost.

We need to decide if we should buy a new vehicle or continue to repair the current vehicle. This doesn’t need to be a vehicle at all. We could be talking about any equipment, for example lawnmowers of a yard work business.

Answer the following questions to determine whether you should buy this new vehicle:

1. Why do you want to buy a new vehicle?

2. For car A (the new car) what is the cost for a three year loan per year? (We assume car B is paid for.)

3. What are the annual costs for service for EACH car? A newer car (Car A) would be at least $400 per year, while Car B would depend on your assumption (you want to assume at least $1000 per year. Feel free to increase this amount.)

4. Find the blue book value of your current car (Car B) and the same car three years older. What is the depreciation per year of Car B?

5. Find the blue book value of a car three years older than the car you are buying (Car A). What is the depreciation per year of the Car A?

6. What is the cost of insurance per year for Car A?

7. What is the cost of insurance per year for Car B?

8. What is the cost of gas per year for Car A? (Approximate here.)

9. What is the cost of gas per year for Car B? (Again, approximate.)

10. What will it cost per year to own Car A?

11. What will it cost per year to keep Car B?

12. Find the difference per month of owning Car A vs. keeping Car B.

13. If you took that difference and put it in a savings account (assume for simplification that you earn 3% for the whole time) how much will you have after those three years?

OK, now that you’ve done the calculations, is it worth the difference to buy the new vehicle for the reason you indicated above?