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Iceland with kids - purchase a 'self-drive' package or DIY?

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Just snapped up a great deal on airfare for mid-August and will be traveling with my two kids (age 8 and 12). We have almost 2 weeks in Iceland. I want to get around the island (can't even be more specific than that right now - very early planning stages). I see there are companies that will arrange the rental car, accomodations, and provide an detailed intinerary. The other possibility is attempt to plan a DIY trip with the help of guidebooks and such. I have traveled quite a bit, both with the kids and without, all over the world. This will be my first trip to Iceland.

1. Does anyone have an opinion on using a tour company for the road trip planning vs. a DIY? Any significant cost differnce to be concerned about?
2. I hope to spend 3 days in/around Reykjavik and then head out father afield. Is a rental car needed in the city, or is there adequate transportation around town?
3. If you self-drive how much of the 'sites" can be done on your own vs. needing a guide at the specific locations anyhow (e.g. inside the national parks, hiking, etc.)

Many thanks in advance!

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