Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate,machine B costs $10,000 and depreciates at a 20% rate,machine C costs $20,000 and depreciates at a 10% rate,and machine D costs $17,000 and depreciates at an 11% rate.The expected real interest rate is 5%.
A)machine A
B)machine B
C)machine C
D)machine D

Question

Quizplus · Accepted Answer

To calculate the user cost, we need to take into account the depreciation rate, expected real interest rate, and initial cost. The formula for user cost is (depreciation rate + expected real interest rate) x initial cost. Using this formula, we can calculate the user cost for each machine as follows:

- Machine A: (0.25 + 0.05) x $15,000 = $4,000
- Machine B: (0.20 + 0.05) x $10,000 = $2,500
- Machine C: (0.10 + 0.05) x $20,000 = $3,000
- Machine D: (0.11 + 0.05) x $17,000 = $3,220

Based on these calculations, machine B has the lowest user cost of $2,500, making it the best choice.

Which of the Following Machines Has the Lowest User Cost