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Cost Benefit Analysis: Buy a new Maverick or Keep the old Mustang
STUDENT NAME
PADM 230 – Public Finance
Keith Yacucha
April 17, 2022
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Introduction
The purpose of this analysis is to determine if there is an overall benefit associated with the
purchase of a new fuel-efficient Ford Maverick to replace a 2007 V8 Ford Mustang. The vehicle would be
used as a family car in addition to daily commuting. This paper will be organized into nine sections that
will follow the nine steps to conducting a Cost Benefit Analysis which includes a recommendation. The
final section of this paper will include a self-evaluation section to fulfill that section of the assignment.
Define the referent group
In the scenario of assessing the CBA of buying a new truck for commuting as well as recreational
use to replace an older inefficient car, the referent group is just the individual making the decision.
Select the portfolio of options
For this analysis there is only one scenario to consider - buy a new Ford Maverick and stop using
the old Mustang- this analysis will be completed over an eight-year period Today (year 0) plus an
additional seven years totaling the eight years for the car loan.
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Catalogue potential impacts and select measurement indicators
Table 1
Potential impacts and selected measurement indicators
Inputs year: 0 1 2 3 4 5 6 7
Car Deposit x
Annual Insurance x x x x x x x x
Annual Interest x x x x x x x x
Annual Maintenance x x x x x x x x
Annual Fuel Cost x x x x x x x x
Outputs year: 0 1 2 3 4 5 6 7
Asset price if sold x x x x x x x x
Practicality (feel good) x x x x x x x X
Reliability x x x x x x x X
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Define base case over the life of the project
Base case would be to keep using the existing 2005 4.7 liter V8 Ford Mustang vehicle for next 8
years. This base case includes the higher gas consumption costs and higher maintenance costs
associated with maintaining an older, less efficient car (Costs increasing annually due to increasing fuel
costs associated with routine use and, assuming that each year the engine becomes older, less efficient,
and more expensive to maintain). Another assumption is that If Sold, Asset will be worth less each year
as the Mustang ages but will never be worthless.
Table 2
Base Case over life of the project
Inputs year: 0 1 2 3 4 5 6 7
Annual Insurance x x x x x x x x
Annual Maintenance x x x x x x x x
Annual Gas x x x x x x x x
Outputs year: 0 1 2 3 4 5 6 7
Asset price if sold x x x x x x x x
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Monetize all impacts
Table 3
Monetize all impacts for Scenario 1
Scenario 1 - Buy Maverick and keep Mustang in Garage
Inputs year: 0 1 2 3 4 5 6 7
Car Deposit $5,000
Annual Insurance $1,000 $1,020 $1,040 $1,061 $1,082 $1,104 $1,126 $1,149
- - - - - - - -
$5,415.2 $5,415. $5,415. $5,415. $5,415. $5,415. $5,415. $5,416.
Annual PMT 6 37 47 58 68 79 89 00
Annual Maintenance $100 $100 $100 $100 $100 $100 $100 $100
Annual Fuel Cost $182 $191 $201 $211 $221 $232 $244 $256
Outputs year: 0 1 2 3 4 5 6 7
asset price (if sold) (1) $35,000 $28,000 $22,400 $17,920 $14,336 $11,469 $9,175 $7,340
Practicality (feel)(2) $1,800 $2,160 $2,268 $2,381 $2,500 $2,625 $2,757 $2,895
Reliability (feel)(3) $500 $525 $551 $579 $608 $638 $670 $704
Notes: (1) Asset in scenario 1 is the Maverick and it depreciates by 20% each year on average
(2) Practicality is a personal judgement based on how good I feel using the new car, this was assumed to
increase in value by 5% each year as the car becomes closer to being paid for and gets used in more
diverse, but less frequent, ways (such as camping, overlanding, etc).
(3) Reliability value was assigned based on the inconvenience factor involved with needing to put the car
in for major repairs. It increases over time because, on average a new car will need less time in the shop
than the old car and will return an increase perceived value of 5% each year.
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Table 4
Monetize all impacts for base case.
Inputs year: 0 1 2 3 4 5 6 7
Annual Insurance (1) $900 $918 $936 $955 $974 $994 $1,014 $1,034
Annual Maintenance (2) $895 $940 $987 $1,036 $1,088 $1,142 $1,199 $1,259
Annual Gas (3) $390 $410 $430 $451 $474 $498 $523 $549
Outputs year: 0 1 2 3 4 5 6 7
Asset price if sold $13,000 $11,700 $10,530 $9,477 $8,529 $7,676 $6,909 $6,218
Notes: (1) Insurance costs assumed to increase by 2% each year
(2) Annual Maintenance based on personal estimate and a 5% per year increase on average
( 3) Annual Gas cost is based on 15 liters per 100km and driving 25 km per week 52 weeks per year.
(1,300 km per year using 195 ltrs of fuel with a Fuel Price of $2 per liter =$390 per year) Also assumed
gas increase of 5% per year.
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Calculate the Net Present Value
Table 5
Net Present Value
Discount 5.19
Scenario 1 rate: %
Inputs NPV Outputs NPV
Car Deposit $9,753 asset price if sold $33,273
Annual Insurance $7,845 practicality (feel good) $17,102
Annual PMT $40,150 Reliability (feel good) $3,975
Annual Maintenance $741 NPV of outputs $54,350
Annual Fuel Cost $1,557
NPV of inputs $60,048
Base Case
Inputs NPV Outputs NPV
Net Annual Insurance $7,061 Asset price if sold $12,359
Net Annual
Maintenance $7,659 NPV of outputs $12,359
Net Annual Gas $3,337
NPV of inputs $18,057
Scenario 1 less the base case
Input / Outputs
Costs $41,991 / $41,991
Benefits
NPV of the Net Benefit $1
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Distribution of Costs and Benefits
Only have a referent group of one - we also have an impact group of one - and no distributional
impacts to identify.
Sensitivity Testing
The main sources of uncertainty appear in the benefit values assigned to both reliability and
Practicality. Additional uncertainty is introduced though the choice of the discount rate used in the NPV
calculations. All areas of uncertainty are highlighted in yellow throughout this report.
At a discount rate of 5%, the cost of fuel can be reduced by $4 in year 0 before it impacts the
outcome at a discount rate of 5% the ‘feel good’ benefits can increase by $3 before the outcome
changes.
The Discount rate can be increased to 5.19% before it impacts the outcome. If the discount rate
is greater than 5.19% then there is less movement capable in the costs and benefit uncertainty
mentioned above.
Recommendation
Buy and use the new Maverick and stop using the old Mustang. The choice of scenario 1 yields a
net benefit of $1 over the base case scenario (5%). Provided that the discount rate is 5.19% or higher
there is a net benefit to selecting the new Maverick.
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Self Evaluation
Overall assessed myself 10/12 based on the following:
1. Overall CBA - (6 Points) Meets expectations. Marks taken away mainly due to a number of
general uncertainties that I have surrounding the Net Present Value step, as well as my
understanding of selecting and assigning a discount rate.
2. APA Formatting - (2 Points) APA style applied to title page and tables, nil external referencing to
consider, I referred to APA style guide to confirm requirements.
3. Mechanics - (2 points) Although I am sure that some mistakes are still lurking, I proof read the
document multiple times and made corrections.
