HACKNEY-RENT-A-CAR The management at Hackney's Southwestern Regional (HSR) are interested in determining the optimal fleet purchase mix for the coming year. There are four types of vehicles that can be purchased: standard, intermediate, compact and subcompact. All cars purchased are depreciated and paid off for over a two-year period, after which they are sold in a secondary market. Table 1 presents the wholesale purchase price and revenues (the second year includes the resale value) over the two-year period for each type of car: Table 1 - Purchase Price and Net Revenue Summary Type Price ($) 1st yr. ($) 2nd yr. ($) Standard 20,000 14,000 23,000 Intermediate 15,000 9,000 15,000 Compact 12,000 7,000 13,000 Subcompact 9,000 5,000 9,000 HSR has established a budget of $5 million for funding the purchases this year. It can either pay the entire amount for the cars or make a down payment and pay the remaining balance over a two-year period. The financing company requires at least a 20% down payment and that at least 50% of the purchase price plus interest must be paid by the end of the first year. The financing company is currently charging 8%. HSR uses a 10% discount rate for financial planning. Hackney management estimates that they can rent all of the cars that are purchased. However, in order to meet overall market demand they wish that each vehicle category represent at least 15 percent and no more than 50 percent of the total number of vehicles purchased.

QUESTIONS:

d. What is the impact on the mix if the financing charge is reduced to 6%?

e. What is the impact on the mix if HSR requires at least 25% of each car type?

f. What is the maximum discount rate that supports paying for the cars over time?