A group of students decided to lease and run a gasoline service station. The lease is for 10 years. Almost immediately the students were on fronted with the need to alter the gasoline pumps to read in liters. The Dayton Company has a conversion kit available for $900 that may be expected to last 10 years. The firm also sells a $500 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 7% inflation rate, which alternative should be selected?