3.25 Buying the new car does not involve any risk. However, the used car has an uncertainty each year for the next three

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3 25 Buying The New Car Does Not Involve Any Risk However The Used Car Has An Uncertainty Each Year For The Next Three 1 (81 KiB) Viewed 17 times

3.25 Buying the new car does not involve any risk. However, the used car has an uncertainty each year for the next three years. The decision tree is shown below. Note that it is also possible to calculate the NPVs for the ends of the branches; the natural interest rate to use would be 10%, although it would be best to use a rate that reflects what you could earn in another investment. This decision tree representation does not discount the values. Down Payment Maintenance and loan payments Year 2 Net Value Year 3 -2722.20 Salvage 3020 New Car -5500 2722 20 -2841 Net Purchase Value -5350 -6350 -7350 -6350 -7350 -8350 -7350 -8350 -9350 -8350 -7350 -8350 -7350 -8350 -9350 Used Car -5500 Year 1 -2522 20 Repairs Year 1 -850 (0.2) 1650 (0.6) -2650 (0.2) Q Repairs Year 2 -700 (0.2) -1700 (0.6) -2700 (0.2) -700 (0.2) 1700 (0.6) -2700 (0.2) -700 (0.2) -1700 (0.0) <-3700 (0.2) Repairs Year 3 -500 (0.2) -1500 (0.6) -2500 (0.2) -500 (0.2) -1500 (0.8) -2500 (0.2) -500 (0.2) -1500 (0.6) -2500 (0.2) -500 (0.2) -1500 (0.6) -2500 (0.2) -500 (0.2) -1500 (0.6) -2500 (0.2) -500 (0.2) -1500 (0.6) -2500 (0.2) -500 (0.2) O-1500 (0.6) -2500 (0.2) -500 (0.2) -1500 (0.6) -2500 (0.2) -500 (0.2) -1500 (0.6) -2500 (0.2) +4 -& +4 Salvage 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 -8350 -9350 -10350 -7350 -8350 -9350 -8350 -9350 -10350 -9350 -10350 -11350