Question: A contractor has to choose one of the following alternatives in performing earth-moving contracts: (a) Purchase a heavy-duty truck for $13,000. Salvage value is expected

A contractor has to choose one of the following alternatives in performing earth-moving contracts:

(a) Purchase a heavy-duty truck for $13,000. Salvage value is expected to be $3000 at the end of the vehicle's 7-year depreciable life. Maintenance is $1100 per year. Daily operating expenses are $35.

(b) Hire a similar unit for $83 per day. Based on a 10% after-tax rate of return, how many days per year must the truck be used to justify its purchase? Base your calculations on straight-line depreciation and a 50% income tax rate.

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