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 price (year 0) of kerosene is $4.30
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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