A salesman from Industrial Water Services (IWS), who is trying to get his foot in the door of Westco Refining, offered electro-dialysis equipment for $2.5 million. This is $800,000 more than the price offered by a competing saleswoman from AG Enterprises. However, IWS said Westco won’t have to pay for the equipment until the 2-year warranty runs out. IWS will also offer an extended 2-year warranty for $100,000, payable 2 years from now. If Westco does want the extended warranty, determine which offer is better using Westco’s real return requirement of 15% per year and an assumed inflation rate of 3.5% per year.
A salesman from Industrial Water Services (IWS), who is trying to get his foot in the door of Westco Refining, offered electro-dialysis equipment for $2.5 million. This is $800,000 more than the price offered by a competing saleswoman from AG Enterprises. However, IWS said Westco won’t have to pay for the equipment until the 2-year warranty runs out. IWS will also offer an extended 2-year warranty for $100,000, payable 2 years from now. If Westco does want the extended warranty, determine which offer is better using Westco’s real return requirement of 15% per year and an assumed inflation rate of 3.5% per year.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
A salesman from Industrial Water Services (IWS),
who is trying to get his foot in the door of Westco
Refining, offered electro-dialysis equipment for
$2.5 million. This is $800,000 more than the price
offered by a competing saleswoman from AG Enterprises.
However, IWS said Westco won’t have to
pay for the equipment until the 2-year warranty
runs out. IWS will also offer an extended 2-year
warranty for $100,000, payable 2 years from now.
If Westco does want the extended warranty, determine
which offer is better using Westco’s real return
requirement of 15% per year and an assumed
inflation rate of 3.5% per year.
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