You and your friend are avid snowboarders and bike racers. Nearly every other weekend you travel to
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Here's how the conversation goes:
Friend: "just think of how much we will save on rentals. The rented van costs us $ 100 a weekend, plus $.50 per kilometre. Most trips are 100 kilometres, one way. With our own van, we will only have to pay for fuel about $.08 per kilometre-and maintenance, about $.25 per kilometre. A used van will only cost about $20,000. Think of the convenience!"
You: "What about insurance? What about depreciation?"
Friend: "Insurance will be only $ 1,200 per year. The salesperson says the van will depreciate slowly, only 10% per year. If we retire from the race circuit in 5 years, the van will still have value. Shouldn't we at least think about it?"
You: "I guess. I think a nominal discount rate of 9% is about right."
a. Do you think you should buy the van? Be sure to state your assumptions.
b. What if all costs are subject to a 3% annual inflation? Do you change your mind?
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
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Related Book For
Fundamentals of Corporate Finance
ISBN: 978-1259024962
6th Canadian edition
Authors: Richard Brealey, Stewart Myers, Alan Marcus, Devashis Mitra, Elizabeth Maynes, William Lim
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