The list price of a new van was $30,000 at a local car dealership. However, a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would be recognized by the dealer as a result of the sale using the constant dollar financial capital maintenance approach is:
A) $10,000
B) $4,000
C) $5,000
D) $9,000

Question

Quizplus · Accepted Answer

Under the constant dollar financial capital maintenance approach, profit is recognized after adjusting for changes in the purchasing power of money due to inflation. The dealer's cost one year ago was $20,000, but due to 5% inflation, the equivalent cost today would be $20,000 * 1.05 = $21,000. Selling the van for $25,000 when the adjusted cost is $21,000 results in a profit of $25,000 - $21,000 = $4,000.

The List Price of a New Van Was $30,000 at a Local