posted by James on .
A grocery store manager must decide whether to buy four 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 $20. If the interest rate is 12 percent and each rug cleaner costs $500, how many should the manager buy? a. none b. two c. one d. four e. three
The answer is three, but how do I get it?
I'm thinking it's a function of saving the money in an account that earns the 12% (compounded monthly) over the 4 year period.
$500 saved @ an annual rate of return of 12% (again, compounded monthly) yields $806.11 - or $306.11 of interest, which comes to $76.73 of interest returned per year - $1.73 better than the $75 per year yield on the fourth rug cleaner.
I used a simple savings calculator to help calculate my answer.