This chapter explains how Thruway King was an interstate trucker, with one of its major expense items being maintenance. With a few exceptions, trucks are like cars as they do not wear out if they are maintained. It was a big enough cost item that a marginal truck's economic life could be prolonged by suspending it. If Thruway suspended maintenance the truck would wear out, ending the truck's physical life. Demand for interstate trucking was sensitive to prosperity, and future prosperity was uncertain. A truck that was marginal today might be profitable tomorrow. A worn‐out truck would not be profitable, no matter how prosperous tomorrow was. Luciano argued that a marginal truck was an option on the level of future demand for interstate trucking. On the other hand, he conceded that some trucks were so old that the option they represented was too far out of the money to justify continued maintenance. When they consequently wore out, he would consign them to the scrap‐yard.
When Plant Wears Out
Treynor on Institutional Investing ; 530-531
2012-01-02
2 pages
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