Two years ago, Corey Jemison bought a truck for $35,000 to offer delivery services. Corey earns...
Two years ago, Corey Jemison bought a truck for $35,000 to offer delivery services. Corey earns $40,000 a year operating as an independent trucker. He has an opportunity to sell his truck for $18,750 and take a position as an instructor in a truck driving school. The instructor position pays $31,250 a year for working 40 hours per week. Driving his truck, Corey works approximately 60 hours per week. If Corey sells his truck, he will invest the proceeds of the sale in bonds that pay a 12 percent return.
a. Determine the opportunity cost of owning and operating the independent delivery business.
b. Based solely on financial considerations, should Corey sell his truck and accept the instructor position?
c. Discuss the qualitative as well as quantitative characteristics that Corey should consider.
Homework Answers
a. The opportunity cost of owning and operating the independent delivery business is the amount foregone that Corey would receive if he works as an instructor in a truck driving school.
b. Based on financial considerations, we can see that the returns from accepting the instructor position is greater than the return obtained in operating his independent delivery business. The per hour rate that Corey gets from being an instructor is 781.25 which is greater than the per hour rate of 667 which is for the independent delivery business. Apart from this, he is also getting a fixed return on bonds which is an additional financial benefit.
c. Qualitative aspects:
i) He is getting a secured return from investment in bonds
ii) The number of hours worked in a week is lower when compared to operating his own business
iii) Since it is a salaried position, there is a greater job stability in the instructor position than in operating his own business.
Quantitative aspects:
i) Financial returns are greater in the instructor position
ii) Per hour rate is greater in the instructor position
iii) Fixed rate of return on investment in bonds
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