The cost of capital for investment, if the price of capital goods rises with the price of other goods and in the absence of taxes, may be summarized as the:
A) nominal interest rate plus the depreciation rate.
B) real interest rate plus the depreciation rate.
C) purchase price of a capital good multiplied by the sum of the nominal interest rate plus the depreciation rate.
D) purchase price of a capital good multiplied by the sum of the real interest rate plus the depreciation rate.

Question

Quizplus · Accepted Answer

The cost of capital for an investment considers the real cost of financing (real interest rate) and the loss in value of the capital good over time (depreciation rate). When multiplied by the purchase price of the capital good, it gives the total cost of capital, accounting for both the cost of financing and the cost of the capital good's depreciation.

The Cost of Capital for Investment, If the Price of Capital