Gateway Tours is choosing between two bus models, one of which lasts longer than the other. Gateway’s discount rate is 8%. It plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown below, which should it choose? For each of the two bus models, give the relevant cost that you would use for comparison purposes.
Gateway Tours is choosing between two bus models, one of which lasts longer than the other. Gateway’s discount rate is 8%. It plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown below, which should it choose? For each of the two bus models, give the relevant cost that you would use for comparison purposes.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Gateway Tours is choosing between two bus models, one of which lasts longer than the other. Gateway’s discount rate is 8%. It plans to continue with one of the two models for the foreseeable future. Based on the costs of each shown below, which should it choose? For each of the two bus models, give the relevant cost that you would use for comparison purposes.
[Note: to make it easier for you to solve this problem, I have already calculated the EAA for one of the buses, as you can see. You do not need to recalculate that one.]
Model Year 0 Year 1 Year 2 Year 3 Year 4
Old Reliable 0 -15 -15 -15 -15
Short and Sweet -12 -12 -6
The relevant cost for Old Reliable is:
-15.00
-49.68
-14.99
-15.01
-12.44
-15.10
-12.42
The relevant cost for Short and Sweet is:
-15.70
-28.26
-15.87
-9.12
-15.84
-8.53
-14.13
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