The present price (year 0) of kerosene is $4.30per gallon, and its cost is expected to increase by 10%per year. (At the end of year 1, kerosene will cost$4.73 per gallon.) Mr. Garcia uses about 800 gallons of kerosene for space heating during a winterseason. He has an opportunity to buy a storage tankfor $600, and at the end of four years, he can sell thestorage tank for $100. The tank has a capacity to supply four years of Mr. Garcia’s heating needs. So, hecan buy four years’ worth of kerosene at its presentprice ($4.30), or he can invest his money elsewhereat 6% interest. Should he purchase the storage tank?Assume that kerosene purchased on a pay-as-you-gobasis is paid for at the end of the year. (However,kerosene purchased for the storage tank is purchasednow.)
The present
per gallon, and its cost is expected to increase by 10%
per year. (At the end of year 1, kerosene will cost
$4.73 per gallon.) Mr. Garcia uses about 800 gallons of kerosene for space heating during a winter
season. He has an opportunity to buy a storage tank
for $600, and at the end of four years, he can sell the
storage tank for $100. The tank has a capacity to supply four years of Mr. Garcia’s heating needs. So, he
can buy four years’ worth of kerosene at its present
price ($4.30), or he can invest his money elsewhere
at 6% interest. Should he purchase the storage tank?
Assume that kerosene purchased on a pay-as-you-go
basis is paid for at the end of the year. (However,
kerosene purchased for the storage tank is purchased
now.)
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