1. Problem Recognition, Definition and Evaluation
Tyler wrecked his new car and the accident is his fault. The owner of the other vehicle got two estimates for the repairs: one was for $803 and the other was for $852. Tyler is thinking of keeping the insurance companies out of the incident to keep his driving record “clean.” Tyler’s deductible on his comprehensive coverage insurance is $500, and he does not want his premium to increase because of the accident. In this regard, Tyler estimates that his semi-annual premium will rise by $60 if he files a claim against his insurance company. In view of the above information, what is the most economical decision to repair the accidented vehicle? [Engineering Economy, problem 1-4]
2. Development of Feasible Alternatives
Three feasible alternatives can be considered for repair of the accidental vehicle:
1. Pay cash/bank cheque to owner of vehicle…
2. Carry out self repairs using personal mechanic …
3. Transfer liability to insurance company …
In weighing the economic options available, the following attributes are critical in reaching a viable decision:
1. Quality of service …
2. Location of workshop …
3. Interest rate on loan (if borrowed money) …
4. Time consuming (duration of repairs) …
5. Cost implication (cost of repairs) …
3. Development of the outcomes for each alternative
Option A : Pay cash to owner of vehicle = $803, interest = $0
In a year’s time, (assume an interest rate of 8%)
Fv = Co X (1 + r) n
Co = Cash flow at period 0 = $803
r = rate of return = 8%
n = number of years = 1 year
Therefore, Fv = 803 X (1+8/100)1 = $867.24
Option B: Pay cash to owner of vehicle = $852, interest = $0
Fv = 852 X (1+8/100)1 = $920.16
Option C: Cash + Transfer balance liability to insurance company = $303 + $500
Given that his annual premium $x increased to $120 + $x. Assume $x = $1
Therefore, in a year’s time (adding premium), Option C = $303 + $500 + $121 = $924
4. Selection of a Criteria
Assuming the owner of the accidental vehicle is not pressed for time, the most economic options for repairing the vehicle would be the one with the least cost implication and least or no interest/risk/premium incurred on any monies used.
5. Analysis and Comparison
Attributes
|
Option A
|
Option B
|
Option C
|
Cost (in a year’s time)
|
$867
|
$920
|
$924
|
Best Choice
|
6. Selection of the Preferred Alternative
Option A is the preferred option.
7. Performance Monitoring & Post Evaluation of Results
Writing a personal check of $803 to the car owner is the cheapest and best option. Option C is the worst option because, even though Tyler will spend only $303 of his personal money, his semi-annual premium rise of $60 will geometrically increase the overall cost of his insurance as the years go by.
8. Reference:
1. Sullivan, W. G., Wicks, E.M., & Koelling, C.P. (2012). Engineering Economy (15th ed.), Chapter 14, New Jersey, NJ. Pearson Higher Education, Inc.
2. FinanceFormulas.net, (2013) Future Value - Financial Formulas and Calculators . Retrieved from: http://www.financeformulas.net/Future_Value.html
3. Amos, J. S. et al. (2012). Skills &Knowledge of Cost Engineering (5th ed), AACE International, Morgantown, USA.
Hycienth....... I honestly don't know what to do with you.....
ReplyDeleteWasn't I very clear that this is NOT the place to be posting these problems.... The purpose of this blog is for you to demonstrate to me that you can show me you can take the theory from the book and apply it to your real working world?
That the underlying principle is known as TRANSFERENCE...... Or "Transfer of Learning"- http://www.nwlink.com/~donclark/hrd/learning/transfer.html
So once again, because you are not following instructions, I have no choice but to REJECT yet another of your blog postings.....
Worse yet, why don't you ask your COLLEAGUES for help? I really hate to keep rejecting your postings but it seems you totally ignore what I write to you.
Regards,
Dr. PDG, Jakarta