When to Replace an Asset: Nemo Haulers Is Considering Whether

question 30

Multiple Choice

When to replace an asset: Nemo Haulers is considering whether to purchase a new mini tractor for moving furniture within its warehouse. Nemo calculates that its current mini tractor generates $3,100 of cash flow per year. A new mini tractor would cost $3,000 and would provide cash flow of $4,000 per year for five years. What is the equivalent annual cash flow for the new mini tractor (round to the nearest dollar) , and should Nemo purchase the new tractor? Assume the cost of capital for Nemo is 10 percent.

• A) $3,000, do not purchase the new tractor
• B) $3,209, purchase the new tractor
• C) $4,000, purchase the new tractor
• D) $12,163, purchase the new tractor

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Definitions:

Income Effect

The alteration in the income of either a person or an economy and the impact this change has on the demand for a specific product or service.

Inferior Good

A type of good for which demand decreases as the income of the consumer increases, opposite to normal goods.

Substitution Effect

The change in consumption patterns due to a change in the price of goods, leading consumers to substitute one good for another.

Income Effects

The shift in income for either an individual or an economy, and its subsequent effect on the amount of a good or service desired.