Question: B. Life Cycle Cost Analysis

There are considered three necessities of life, food, clothing, and shelter. However, a fourth has assumed the status of necessity, personal transportation. To determine how much we spend on this "necessity" over our lifetime, we can perform a life cycle analysis.

To simplify the process, ignore inflation (in essence, assume all costs increase at the general rate of inflation and does not impact your tax rate). Consider a person that buys their first new car at the age of 20 and drives until the age of 80. They finance their cars for 60 months, and when the last payment is made, they trade it in for another new car (trade in value = book value at year 6), and repeat the process. Since it is considered for personal use, there are no tax deductibility considerations. Use the following data:

New car cost = $20,000

Car annual book values by year

Year 1 2 3 4 5 6

$20,000 $15,000 $12,000 $10,000 $8,500 $7,000

Finance rate = 7% APR

Sales tax = 6% of new car value at time of purchase (trade in does not reduce sales tax)

Personal property tax rate = 2% per year

Annual insurance cost = $500 + 1% of car book value

Average gas mileage = 18 mpg

Average gas cost = $2.50/gallon

Average annual mileage = 15,000 miles

Average annual maintenance costs by year

Year 1 2 3 4 5

$200 $250 $300 $400 $500

Annual license fees - $25

The attached spreadsheet provides a solution to this problem, using the repeated 5-year cycles of costs. Instead of expressing life cycle costs in terms of net present worth, it computes the values in terms of future value at the person’s 80 ^th birthday,. using a discount rate of 8%. At the person’s 80 ^th birthday, how much of their lifetime wealth had they spent on personal transportation?

Price: $2.99

Solution: The downloadable solution consists of 4 pages
Deliverable: Word Document