Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs)of $4,000 per year. His other option is to go to work for someone else earning net income of $3,000 per year. He should:

Question

Quizplus · Accepted Answer

If Joe purchases the delivery truck, he will earn $4,000. To be equally well off working for somebody else (his opportunity cost), he would have to earn $3,000 per year and still be able to cover the real interest for the van. With earnings of $4,000 and an opportunity cost of his time of $3,000 his borrowing costs must only be $1,000. $1,000/$20,000 = 0.05 = 5 percent.

Joe's Taco Hut Can Purchase a Delivery Truck for $20,000