Problem 2 Suppose you own an older car. In the past year, you paid $2500 to replace the transmission, bought four new tires for $320, and installed a music system for $250. You want to keep the car...

Extracted text: Problem 2 Suppose you own an older car. In the past year, you paid $2500 to replace the transmission, bought four new tires for $320, and installed a music system for $250. You want to keep the car for 2 more years because you invested money 3 years ago in a 5-year savings account which is earmarked to pay for your dream car. Today your current car's engine failed. You have two alternatives. You can have the engine overhauled at a cost of $1800 and then most likely have to pay another $800 per year for the next 2 years for maintenance. The car will have no salvage value at that time. Alternatively, a friend offers to give you a $5000 loan to buy another used car. You must pay the loan back in two equal installments of $2500 due at the end of Year 1 and Year 2, and at the end of the second year you must give your friend to car. What interest rate are you paying on this loan from your friend, if the vehicle will be worth $3000 after 2 years? Do you think this is an ethical interest rate? The "new" used car has an expected annual maintenance cost of $300. If you select this alternative, you can sell your current vehicle to a junk-yard for $500. Interest is 6%. Which alternative should you select and why? Clearly show your method in terms of economic factors.