Problem

The present price (year 0) of kerosene is $4.30 per gallon, and its cost is expected to increase by 10% per year. (At the end of year 1, kerosene will cost $4.73 per gallon.) Mr. Garcia uses about 800 gallons of kerosene for space heating during a winter season. He has an opportunity to buy a storage tank for $600, and at the end of four years he can sell the storage tank for $100. The tank has a capacity to supply four years of Mr. Garcia's heating needs, so he can buy four years' worth of kerosene at its present price ($4.30), or he can invest his money elsewhere at 6%. Should he purchase the storage tank? Assume that kerosene purchased on a pay-as-you-go basis is paid for at the end of the year.