Final answer:
The question is about whether Cullumber Automotive should add safety inspections to its services, considering equipment costs, cash flows, and cost of capital, in the context of elastic and inelastic demand for cars and regulatory cost-benefit analysis.
Step-by-step explanation:
The question involves analyzing whether Cullumber Automotive should add state safety inspections to its service offerings based on a cost-benefit analysis and considering the company's cost of capital.
The initial equipment cost, subsequent cash flows, and the cost of capital are crucial factors in this decision-making process.
If the demand for cars is inelastic, carmakers like Cullumber Automotive could pass the cost of safety inspections on to consumers. Conversely, with elastic demand, the manufacturer would likely absorb this cost.
Government regulators also use cost-benefit analyses to decide on the reasonableness of regulations, such as those concerning required safety systems, where the cost per life saved is a benchmark for justification.
The complete question is:Cullumber automotive is considering adding state safety inspections to its service offerings. The equipment necessary to perform these inspections will cost 563,000 and will generate cash flows of197,000 over each of the next five years. If the cost of capital is 14