Question

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 $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:
a) purchase the truck if the real interest rate is less than 15%.
b) not purchase the truck if the real interest rate is greater than 1%.
c) purchase the truck if the real interest rate is greater than 5%.
d) purchase the truck if the real interest rate is less than 5%.

Answer 1

Answer:

The correct answer is option (d).

Explanation:

According to the scenario, the given data are as follows:

Truck cost = $20,000

Net income from truck = $4,000

If work somewhere else, Net income = $3,000

If he work some where else he save $20,000.

If the interest rate is 5%, then,

Interest amount = 5% × $20,000 = $1,000

So, it means, if the interest rate is 5%, and he work some where else than his net income = $3,000 + $1,000 = $4,000.

So, If the real interest is less than 5% only than purchasing a truck is the right option.

Hence, purchase the truck if the real interest rate is less than 5% is correct.