Reference no: EM132510097

Point 1: You are running a cab business and your current cab ?eet is expected to produce $250,000 per year (?xed in nominal terms) in revenues (after labor costs) for the next two years (1 and 2). Your cab ?eet has a book value of $50,000 today, $30,000 one year from now, and $20,000 two years from now. All book values are recorded in real terms. If you try to sell your cab ?eet you can only fetch its book value (in real terms) on the open market. Your cab ?eet gets you 20 miles per gallon and it gets driven 400,000 miles per year. The maintenance costs you $150,000 per year (?xed in nominal terms). The tax rate is 34%, the nominal discount rate is 10%, and the rate of in?ation is 2% (you should use a shortcut r = R +i to ?nd the real rate). At the end of the second year you plan to get out of the cab business and get an MBA.

Question 1: What is the per gallon price of gasoline in real terms at which you just break even?