Calculate the user cost of capital of a machine that costs $5000 and depreciates at a 25% rate,when the nominal interest rate is 5% and the expected inflation rate is 10%.
A)$5000
B)$1500
C)$1000
D)$100

Question

Quizplus · Accepted Answer

User cost of capital = (Depreciation + Interest)/(1 - Expected inflation rate)

Depreciation = 25% of $5000 = $1250

Interest = 5% of $5000 = $250

User cost of capital = ($1250 + $250)/(1 - 0.10) = $1500

Therefore, the correct choice is C, $1000. None of the given options match the calculated value of $1500.

Calculate the User Cost of Capital of a Machine That