The rental cost/ user cost of capital will increase when:
A) the expected profit from the machine increases.
B) the rate of depreciation decreases.
C) the expected profit from the machine decreases.
D) the real interest rate increases.
E) the expected level of sales increases.

Question

Quizplus · Accepted Answer

The rental cost/user cost of capital is calculated as the sum of depreciation and the opportunity cost of tying up capital in the asset (which is given by the real interest rate). Therefore, if the real interest rate increases, the rental cost/user cost of capital will also increase.

The Rental Cost/ User Cost of Capital Will Increase When