The present price (year 0) of kerosene is $4.30 per gallon, and its cost is expected...

The present price (year 0) of kerosene is $4.30 per gallon, and its cost is expected to increase by 10% per year. (At the end of year 1, kerosene will cost $4.73 per gallon.) Mr. Garcia uses about 800 gallons of kerosene for space heating during a winter season. He has an opportunity to buy a storage tank for $600, and at the end of four years he can sell the storage tank for $100. The tank has a capacity to supply four years of Mr. Garcia's heating needs, so he can buy four years worth of kerosene at its present price ($4.30), or he can invest his money elsewhere at 6%. Should he purchase the storage tank? Assume that kerosene purchased on a pay-as-you-go basis is paid for at the end of the year. (However, kerosene purchased for the storage tank is purchased now).

Hello, I have seen previous answers to the question above. However, I have two concerns as detailed below.

-In part one, since annual equivalent cost is NPV/annuity factor, I think the $100 needs to be converted to an NPV before applying the annuity factor

-In part two, can you clarify why $3,784 is used?

Let me know what you think, thanks.

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PLEASE RATE POSITIVE AND SUPPORT ME. THANK YOU

Rahul Sunny answered 1 year ago

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