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Fact 18.5.1
The Burning Belly Taco Stand is considering buying some new special ovens. Each oven will cost $1,000, and will last for 2 years before it wears out. The ovens will be used to make the Taco Stands famous "Burning Ring of Fire" tacos, and will generate a value of marginal product of $600 for the first oven, $570 for the second oven, and $530 for the third oven. (Assume all revenues are earned at the end of the year.)
-Consider Fact 18.5.1. If the rate of interest is 10 percent, how many ovens will the Burning Belly Taco Stand buy?

Question

Quizplus · Accepted Answer

The NPV of the first oven is $600 - $1,000/(1.1)^1 = -$181.82. The NPV of the second oven is $570 - $1,000/(1.1)^2 = -$215.45. The NPV of the third oven is $530 - $1,000/(1.1)^3 = -$252.23. Therefore, the Burning Belly Taco Stand will buy only one oven.

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