A construction firm can buy a bulldozer for $200,000. Gasoline costs $500 per month, the interest rate is 15 percent, and depreciation is $25,000 per year. If the bulldozer is purchased, the monthly implicit rent will be

Question

Quizplus · Accepted Answer

The monthly expenses for the bulldozer can be broken down as follows:
Gasoline: $500
Interest: ($200,000 x 0.15) / 12 = $2,500
Depreciation: $25,000 / 12 = $2,083.33
Total Monthly Expenses: $5,083.33

To calculate the implicit rent, we need to add the opportunity cost of not investing the $200,000 into something else. Assuming a rate of return of 5%, the implicit rent can be calculated as:
$200,000 x (0.05 / 12) = $833.33

Therefore, the total monthly cost of owning the bulldozer is:
$5,083.33 + $833.33 = $4,916.67

Since this cost is less than the monthly rental cost of $5,000, it would be more cost-effective for the construction firm to purchase the bulldozer.

A Construction Firm Can Buy a Bulldozer for $200,000