You need to buy some new tires for your“old beater”. You are consideringpurchasi

ID: 1230246 • Letter: Y

Question

You need to buy some new tires for your“old beater”. You are consideringpurchasing

either the “Econo-Ride”, which costs$33.95 per tire, or the “Road King”, whichcosts

$65.50. Both tires are alike except that the“Road King” is more durable and willlast

longer. Regardless of which tire is purchased,balancing and installation costs are $1.50

per tire. The salesman says the“Econo-Ride” will last 20,000 miles. Assume aMARR

of 6% and that you will drive 10,000 miles peryear.

a) How many miles would the “RoadKing” have to last to make you indifferent

in your choice

b) The salesperson says the “RoadKing” will be on sale next week. If he also

says the tire will last 30,000 miles, what wouldthe sale price have to be to

makeyou indifferent in your choice?

(a)

4(1.5 + 33.95)(A/P, 6%, 20,000/10,000)

= 4(1.5 + 65.50)(A/P, 6%, N)

(A/P, 6%, N) = .28859

From tables N = 4, or 40,000 miles

(b)

4(1.5 + 33.95)(A/P, 6%, 20,000/10,000)

= 4(1.5 + P)(A/P, 6%, 30,000/10,000)

P = $50.18

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