From the course: Finance Foundations
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Example: Buying a car in Hong Kong
From the course: Finance Foundations
Example: Buying a car in Hong Kong
Let's walk through an actual example of a capital budgeting decision. This is a real example that my wife, Ramona, and I went through when we moved to Hong Kong. Should we buy a car? The cost of the car we were considering was HK$40,000. Now, HK$8 is roughly equivalent to one U.S. dollars, so that's about 5,000 U.S. dollars. So we're not talking about a great car, just a weekend car so we can save on subway and bus fares for my wife and I and our children. We figured that our annual savings would be about HK$10,000. We estimated the useful life of the car to be about five years. And for our family cost of capital, we use 10 percent. So the capital budgeting decision is this, should the Stice family buy this car? Well, the first thing we did was compute the payback period. If we spend HK$40,000 to buy this car, and we'll save $10,000 per year, we will recover our investment cost in four years. This is called the payback period. All right. Now let's do some present value calculations to…
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