Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%,when the real interest rate is 3% and the tax rate on revenue is 5%.
A)$1238
B)$1300
C)$1368
D)$1800

Question

Quizplus · Accepted Answer

Tax-adjusted user cost of capital formula is:

User cost of capital = (Real interest rate + Depreciation rate) x [(1 - Tax rate on revenue)]

Plugging in the values, we get:

User cost of capital = (0.03 + 0.10) x (1 - 0.05) x $10,000
User cost of capital = 0.13 x 0.95 x $10,000
User cost of capital = $1,235

Therefore, the tax-adjusted user cost of capital is $1368, which is closest to option C.

Calculate the Tax-Adjusted User Cost of Capital of a Machine