Carlos owns and operates a restaurant. To help expand his business, Carlos is considering the feasibility of offering a wedding catering service. To open this service, Carlos needs a van to deliver his food to the various weddings. After doing some research and price-checking, he has found two vans that will suit his needs. A new van will cost $50,000 and will last 8 years. A used van will cost -$30,000 and will last 5 years. After determining the NPV of both vans, the new van has a NPV of -$38,232.12 and the used van has a NPV of -$23,443.89. Carlos has a 10% required rate of return, a 3% risk premium, a 25% marginal tax rate and an inflation rate of 1%.

What is the Real Discount Rate?

a.10.02%

b.7.65%

c.8.02%

d.8.66%

What is the annuity equivalent for the new van?

a.($6,258.56)

b.($7,023.72)

c.($6,821.38)

d.($8,707.28)

What is the annuity equivalent for the used van?

a.($6,286,26)

b.($5,014.86)

c.($7,517.62)

d.($5,974.69)

If Carlos makes his decision based on the Annuity Equivalents, which van should he buy?

a.Used Van

b.New Van

c.Indifferent between the two