The user cost of capital is represented by which of the following variables?
A) IIt/(rt + 6).
B) 1/(rt + 6).
C) rt.
D) rt + 6.
E) IIt.

Question

Quizplus · Accepted Answer

The user cost of capital is represented by the formula: (rt + δ - πe)/(1-τ) where rt is the interest rate, δ is the rate of depreciation, πe is expected inflation rate and τ is the tax rate. Because the options given do not include all the variables required by this formula, we have to consider which options are closest to this formula. Option D is the closest because rt is included, and the constant 6 could represent δ + πe - τ. Therefore, D is the best approximation of the formula for user cost of capital among the given options.

The User Cost of Capital Is Represented by Which of the Following