A driver needs new tires for her car and is trying to decide if she should purchase "low rolling resistance" tires. The regular tires cost $300 (for all 4 tires) and will last 3 years. The "low rolling resistance" tires cost $400 and will also last 3 years, saving $50 per year in gas. a. What is the payback period for choosing the "low rolling resistance" tires? b. If the expected return she is getting on her investments is 10%, should she purchase the "low rolling resistance" tires? Explain. c. By how much would the price of the "low rolling resistance" tires need to change to alter your answer for part b? d. By how much would the expected return on investments need to change to alter your answer for part b? Hint: What is the IRR? e. Future gas prices are uncertain. If there is a 40% chance gas prices will drop, so that the tires will only save $20 per year (and a 60% chance that savings will be the original $50 per year), should the tires be purchased

Answer rating: 100% (QA)

a Payback period initial investment annual savings Payback period 400 300 50 100 50 2 years The payback period for choosing the low rolling resistance ... View the full answer