A new assembly line robot costs $1.2 million and is expected to depreciate by 10% at the end of next year. The real interest rate is 4.5%. What is the user cost of the robot for one year?
A)$66,000
B)$54,000
C)$174,000
D)$120,000

Question

Quizplus · Accepted Answer

The user cost of the robot for one year includes both the depreciation cost and the opportunity cost of capital. The depreciation cost is 10% of $1.2 million, which is $120,000. The opportunity cost of capital is 4.5% of $1.2 million, which is $54,000. Adding both gives $120,000 + $54,000 = $174,000.

A New Assembly Line Robot Costs $1