The Johnsons Decide to Buy a Car
The Johnsons have decided to move out of their apartment and into some form of owned housing. Although they have not decided what type of housing they will buy, they know that Belinda will no longer be able to ride the bus to work. Recognizing this fact, they are in the market for another car. They have decided not to buy a new car but think they have some room in their budget for a used car, given the raises each has received this year (see Table). Harry and Belinda estimate that they could afford to spend about $3200 on an inexpensive used car by making a down payment of $600 and financing the remainder over 24 months at $120 per month.
Table 1 Annual Budget Estimates for 2009 for Harry and Belinda Johnson
(a) Make suggestions about how the $120 might be integrated into the Johnsons’ budget (Table) without changing the amount left over at the end of each month. Harry and Belinda want to retain that extra money to help defray some of the added expenses of home ownership
(b) Which sources of used cars should they consider? Why?
(c) Assume that the Johnsons have narrowed their choices to two cars. Both have air conditioning, AM-FM radio, and automatic transmission. The first car is an eight-year-old Chevrolet Lumina with 102,000 miles; it is being sold for $3400 by a private individual. The hatchback-style car has a six-cylinder engine, and the seller has kept records of all repairs, tune-ups, and oil changes. The car will need new tires in about six months. The second car is a nine-year-old, two-door Ford Focus with 116,000 miles, being sold by a used-car dealership. It has a four-cylinder engine. Harry contacted the previous owner and found that the car was given in trade on a new car about three months ago. The previous owner cited no major mechanical problems but simply wanted a bigger car. The dealer is offering a written 30-day warranty on parts only. The asking price is $3200. Which car would you advise the Johnsons to buy? Why?