Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (i.e. ,after taxes and maintenance and operating costs)of $2,000 per year.He should

Question

Quizplus · Accepted Answer

The net present value (NPV) of purchasing the truck would be positive if the present value of the expected net income is greater than the cost of the truck. To calculate the NPV, we need to discount the future net income using the real interest rate. Assuming a discount rate of 10%, the present value of the net income stream would be:

PV = $2,000 / 0.10 = $20,000

Since this is equal to the cost of the truck, the NPV would be zero, which means the investment is just breaking even. If the real interest rate is less than 10%, the present value of the net income stream would be greater than $20,000, resulting in a positive NPV. Therefore, Joe should purchase the truck if the real interest rate is less than 10%. Choice D is the closest option to this range.

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