A new assembly line robot with a price tag of $2.5 million is expected to depreciate by 3% at the end of next year. The real interest rate is 2.5%. What is the user cost of the robot for one year?
A)$62,500
B)$75,000
C)$137,500
D)$12,500

Question

Quizplus · Accepted Answer

The user cost of capital formula is:
User cost = (depreciation + real interest rate*value of capital)/value of capital
In this case:
depreciation = 3%*$2.5 million = $75,000
value of capital at the beginning of the year = $2.5 million
value of capital at the end of the year = $2.5 million - $75,000 = $2,425,000
User cost = ($75,000 + 2.5%*$2,425,000)/$2.5 million = $137,500

A New Assembly Line Robot with a Price Tag of $2.5