"Between 2000 and 2008, the price of oil increased from $30 per barrel to $140 per barrel, and the price of gasoline in the Unit
ed States rose from about $1.50 per gallon to over $4.00 per gallon. Unlike in the 1970s when oil prices spiked, there were no long lines outside gas stations. Why?'
1 answer:
Answer:
C) There was no price control on gasoline at the time.
Explanation:
During the 1970s the US government established a price ceiling on gasoline, but as all price ceilings set below the equilibrium price, it results in both a deadweight loss and a supply shortage.
Since the price is "too cheap", then the quantity demanded will be more than the quantity supplied. Rising costs in gasoline production made things worst, since suppliers were constantly reducing their supply of gasoline, while consumer demand was constantly increasing.
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Answer:
a. Internal Rate of Return
Annual Cash Inflows = (Net Savings - Depreciation) * ( 1 - Tax Rate) + (Depreciation * Tax Rate)
Net savings = Delivery Costs - Operating and Maintenance Costs with the Used Truck
= 32,000 - 21,000
= $11,000
Depreciation = (Cost of used truck - Salvage value) / Useful life
= (13,000 - 2,000) / 3
= $3,667
Annual Cash inflows = $7,000 as there are no taxes.
Use Excel to calculate IRR as shown in the attachment.
The cost of the truck is the outflow and the savings and the salvage value are inflows which means that the last inflow will be $13,000 because salvage value is added in the last year.
IRR = 69.408%
b. If the IRR is greater than the cost of capital or required rate of return, the project should be chosen.
c. The IRR of 69.408% is greater than the MARR of 34% so Nancy should buy the truck.
