Suppose Chase Bank owns a truck that it leases to Ryder Inc. The truck's value is $100,000 and it is expected to deteriorate at a rate of 5 percent per year. If the real interest rate is 2 percent, then Chase's total costs of owning the truck are

Question

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Chase's total costs of owning the truck include both the depreciation cost and the opportunity cost of the capital tied up in the truck. The depreciation cost is 5% of $100,000, which is $5,000. The opportunity cost, given the real interest rate of 2%, is 2% of $100,000, which is $2,000. Adding these together gives a total cost of $7,000.

Suppose Chase Bank Owns a Truck That It Leases to Ryder