Question

A store manager must decide how many rug cleaners to rent to customers. The manager estimates that the first would yield $200 a year, the second $150, the third $75, and the fourth $50. If the interest rate is 12 percent and each rug cleaner costs $500/yr (all costs included), including replacement cost, how many should the manager rent?

Answer 1

Answer:

The store manager must decide to buy 3

Explanation:

Given that:

• The first:  $200 a year
• The second $150
• The third $75,
• The fourth $50
• Interest rate is 12 percent
• Investment: $500

As we know that the rate of return will be: Income / Investment

So the rate of return of:

• The first:  $200 / $500 = 0.4 = 40%
• The second $150 / $500 = 0,3 = 30%
• The third $75 / $500 = 0.15 = 15%
• The fourth $50 / $500 = 0.1 = 10%

Only three rug cleaners have the rate of return greater than the interest rate so the store manager must decide to buy 3