An Entrepreneur Is Considering How Many Limousines to Purchase When

question 92

Multiple Choice

An entrepreneur is considering how many limousines to purchase when he starts up a limousine service. Below are his estimates of the number of limousine rentals the service will make during a year, depending on the number of limousines available. After paying all non-interest expenses, the owner expects to net $10 per rental. Each limousine costs $50,000. How many limousines should he purchase if the real interest rate is 6.5%?

• A) 1.
• B) 2.
• C) 3.
• D) 4.

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Definitions:

Straight-Line Depreciation

A method of calculating the depreciation of an asset by evenly spreading its cost over the expected life of the asset.

Asset Impairment Loss

A sudden write-down or devaluation of an asset to its fair market value which is lower than its currently recorded cost, reflecting unexpected decreases in value.

Future Cash Flows

Estimated incoming and outgoing cash transactions expected to occur in the future.

Net Book Value

The value of an asset after accounting for depreciation or amortization, representing its residual value on the balance sheet.