A group of students decided to lease and run a gasoline service station. The lease is for 10 years. Almost immediately the students were confronted with the need to alter the gasoline pumps to read in liters. The Dayton Company has a conversion kit available for $3000 that may be expected to last 10 years. The firm also sells a $1000 conversion kit that has a 5-year useful life. The students believe that any money not invested in the conversion kits may be invested elsewhere at a 10% interest rate. Income tax consequences are to be ignored in this problem. (a) Assuming that future replacement kits cost the same as today, which alternative should be selected? (b) If one assumes a 4% inflation rate, which alternative should be selected?

A group of students decided to lease and run a gasoline service station. The lease is for 10 years. Almost immediately the students were confronted with the need to alter the gasoline pumps to read in liters. The Dayton Company has a conversion kit available for $3000 that may be expected to last 10 years. The firm also sells a $1000 conversion kit that has a 5-year useful life. The students believe that any money not invested in the conversion kits may be invested elsewhere at a 10% interest rate. Income tax consequences are to be ignored in this problem. (a) Assuming that future replacement kits cost the same as today, which alternative should be selected? (b) If one assumes a 4% inflation rate, which alternative should be selected?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter8: Cost Analysis

Section: Chapter Questions

Problem 8E

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