Depreciation, Break-Even & Expected Value

Worked: a contractor’s compactor

• Bought for $90,000 with a $10,000 salvage value after 8 years: D = 80,000/8 = $10,000 a year, and the book value after 3 years is $60,000.
• Owning costs $14,000 a year fixed plus $45 an hour to run; renting costs $95 an hour, operator and fuel included. Break-even = 14,000/(95 − 45) = 280 hours a year. Above that, owning wins.
• A levee protects $2.5M of property against a flood with a 4% chance in any year: expected annual damage = 0.04 × 2,500,000 = $100,000, the most worth spending each year to prevent it.