Hi In the solution to work out the expected cost in each year, is it correct to say: a) value of the new car increases mid-year b) the value of the old car depreciates for a further one year? Why is this so? Thanks
Hi Jensen, In this case, the examiners' solution awarded marks to students who assumed simple increases in values and straight-line depreciation, as well as to those who assumed compound increases in values and compound depreciation. Your assumption isn't really very satisfactory though. After all, in real life, price inflation would be a continuous function. In any case, it wouldn't lead to any simpler calculations, so it'd be better to stick with the examiners' approach. It's possible I suppose that they'd award marks for different assumptions, but I wouldn't like to guarantee it. In general, my rule would be to not use an over-simplified assumption if I can help it. For part (b) I'm not sure where your idea comes from. It's not in the Examiners' Report that I can see. If you've made it up, I can't quite see why, and you appear to be questioning it yourself, so if I were you I'd scrap it! Kind regards, Katherine.
Hi Katherine I was simply trying to understand the examiner's solution. In the calculations, (say 1st year gap, compound interest), it's 1.05^0.5 - 0.9 * 0.85^ 0.5. It seems to me there is a timing difference, as I would have omitted the 0.85, so: 1.05^0.5 - 0.9^0.5 Do you see where I'm coming from?
Hello Jensen, There is 10% initial depreciation, because a car loses a chunk of its value the moment you drive it off the forecourt. This is where the 0.9 comes from. It only happens once though, so you shouldn't have it "to the power of anything". From then on, there is 15% depreciation per year. This is where the 0.85 comes from. This is per year, so you should have this as "to the power something." Good luck! Katherine.
Oh i see it now. The initial depreciation works immediately, and not at the end of the year. Thanks Katherine!
