Which of the following is the user cost of capital?
A) implicit cost of capital + explicit cost of capital
B) interest rate × value of capital - depreciation
C) economic depreciation + (interest rate)(value of capital)
D) interest rate - depreciation

Question

Quizplus · Accepted Answer

The user cost of capital is the cost incurred by firms when purchasing, maintaining and disposing of capital goods. It includes two components- 1) Economic depreciation- this is the decrease in the resale value of capital goods over time and 2) the opportunity cost of investment i.e. the return that could have been earned if the funds used for purchasing the capital goods were invested somewhere else. The formula for user cost of capital is given as:

User cost of capital = Economic depreciation + (Interest rate)(value of capital)

Option A is incorrect because it adds both implicit and explicit costs of capital which is not an accurate representation of user cost of capital. 
Option B is incorrect because it subtracts depreciation from the product of interest rate and value of capital which doesn't properly account for the two components of user cost.
Option D is incorrect because it doesn't account for economic depreciation which is an important component of user cost of capital.

Which of the Following Is the User Cost of Capital