Calculate the user cost of capital of a machine that costs $100,000 and depreciates at a rate of 25%,when the nominal interest rate is 4% and the expected inflation rate is 1%.
A)$3000
B)$25,000
C)$28,000
D)$29,000

Question

Quizplus · Accepted Answer

The formula for user cost of capital is:

User Cost of Capital = (D + R + (P - X)) / (P + X)

Where: 
D = Depreciation 
R = Real Interest Rate 
P = Purchase Price 
X = Expected Inflation Rate

Plugging in the given values:

D = $100,000 * 25% = $25,000 
R = 4% - 1% = 3% (Real interest rate is nominal interest rate minus inflation rate) 
P = $100,000 
X = 1%

User Cost of Capital = ($25,000 + 3% * $100,000 + (1% - 1%)) / ($100,000 + 1%) 
User Cost of Capital = $28,000

Therefore, the correct answer is C) $28,000.

Calculate the User Cost of Capital of a Machine That