Marginal costs Jimmy Johnson is interested in buying a new Jeep SUV. There are two options available, a V6 model and a V8 model. Whichever model he chooses, he plans to drive it for a period of 5 years and then sell it. Assume that the tradein value of the two vehicles at the end of the 5year ownership period will be identical.
There are definite differences between the two models, and Jimmy needs to make a financial comparison. The manufacturer’s suggested retail price (MSRP) of the V6 and V8 are $30,260 and $44,320, respectively. Jimmy believes the difference of $14,060 to be the marginal cost difference between the two vehicles. However, there is much more data available, and you suggest to Jimmy that his analysis may be too simple and will lead him to a poor financial decision. Assume that the prevailing discount rate for both vehicles is 5.5% annually. Other pertinent information on this purchase is shown in the following table:
V6 
V8 

MSRP 
$30,260 
$44,320 
Engine (liters) 
3.7 
5.7 
Cylinders 
6 
8 
Depreciation over 5 years 
$17,337 
$25,531 
Finance charges* over entire 5year period 
$5,171 
$7,573 
Insurance over 5 years 
$7,546 
$8,081 
Taxes and fees over 5 years 
$2,179 
$2,937 
Maintenance/repairs over 5 years 
$5,600 
$5,600 
Average miles per gallon 
19 
14 
Ownership period in years 
5 
5 
Miles driven per year over 5 years 
15,000 
15,000 
Cost per gallon of gas over 5year ownership 
$3.15 
$3.15 
a. Calculate the total “true” cost for each vehicle over the 5year ownership period.
b. Calculate the total fuel cost for each vehicle over the 5year ownership period.
c. What is the marginal fuel cost from purchasing the larger V8 SUV?
d. What is the marginal cost of purchasing the larger and more expensive V8 SUV?
e. What is the total marginal cost associated with purchasing the V8 SUV? How does this figure compare with the $14,060 that Jimmy calculated?
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