A home health care firm has purchased five automobiles. Each automobile costs $24,000
A home health care firm has purchased five automobiles. Each automobile costs $24,000 and has an estimated useful life of three years. Each year, the replacement cost of the automobiles is expected to increase ten percent. At the end of the third year, the replacement cost would be $31,944 per vehicle. The firm anticipates that each automobile will be used to make 1500 patient visits per year. If the firm prices each visit to recover just the historical cost of the automobiles, it will include a capital cost of $5.33 per visit ($24,000 divided by 4500 total visits). Assuming the revenue generated from this capital charge is invested at ten percent, will the firm have enough funds available to meet its replacement cost? How would this situation change if price level depreciation were used to establish the capital charge?
