Suppose you have the opportunity to acquire a taxi license that gives you the ri

Suppose you have the opportunity to acquire a taxi license that gives you
the right to operate a taxi cab. The following information on the fixed costs
of operating a cab for a year are shown in Table 1. You expect that your cab
will provide 2500 rides in a year at an average fare of $15.00 and average
fuel usage of $5.00. You can buy a car that is just acceptable for $20000 but
it will only last for two years and then its salvage value will be essentially
zero. The cost of the cab is sunk. Your brother-in-law the accountant
informs you that it would be normal to depreciate the cab using straight
line depreciation or $10000 per year. He calculates that this means a rate
of return in the first year of 20% and since the return on your next best
alternative is 22% suggests that you not invest in the taxi license.