Calculate the user cost of capital of a machine that costs $5000 and depreciates at a rate of 25%,when the nominal interest rate is 10% and the expected inflation rate is 5%.
A)$150
B)$500
C)$1500
D)$5000

Question

Quizplus · Accepted Answer

The user cost of capital is calculated as the sum of the depreciation rate and the real interest rate, multiplied by the cost of the machine. The real interest rate is the nominal interest rate minus the inflation rate (10% - 5% = 5%). Therefore, the user cost of capital is (25% + 5%) * $5000 = 30% * $5000 = $1500.

Calculate the User Cost of Capital of a Machine That