Joe's Taco Hut can purchase a delivery truck for $20,000 and he estimates it will generate a net income (after taxes, maintenance and operating costs) of $2,000 per year. He has no other opportunities. He should:

Question

Quizplus · Accepted Answer

The decision of whether or not to purchase the truck depends on the real interest rate. Since Joe has no other opportunities, the net income from the truck is his only option. He should purchase the truck if the real interest rate is less than the return he will earn from the truck. We calculate this by dividing the net income by the cost of the truck: $2,000 / $20,000 = 0.10 or 10%. Therefore, Joe should purchase the truck if the real interest rate is less than 10%. Choice D is the only option that meets this criterion.

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