Question
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
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
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