Taglioni’s Pizza Company has to choose a new delivery car from among three alternatives.

Assume that gasoline costs $3.00 per gallon and that the firm’s cost of capital is 12%. The car will be driven 12,000 miles per year.

Car 1 Car 2 Car 3 Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,000 $20,000 $23,000 Mileage per gallon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 12 24 Useful life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 years 5 years 5 years Salvage value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000 $500 $1,000 Required:
1. Which car should the company purchase?
2. How would your answer change if the price of gasoline decreased to $2 per gallon?