Question

Calculate the user cost of capital of a machine that produces 100 units of output per year if d = 25%, i = 13%, and 1 = 3%.

a) 41 units of output
b) 20 units of output
c) 35 units of output
d) 25 units of output

Answer 1

The user cost of capital for the machine that produces 100 units of output per year is approximately 0.1379.

Step-by-step explanation:

The user cost of capital can be calculated using the formula:

User Cost of Capital = (d - i) / (1 - i)

Where d is the depreciation rate, i is the interest rate, and 1 is the interest rate plus the inflation rate.

In this case, d = 25%, i = 13%, and 1 = 3%.

Substituting these values into the formula, we get:

User Cost of Capital = (0.25 - 0.13) / (1 - 0.13) = 0.12 / 0.87 ≈ 0.1379

Therefore, the user cost of capital for the machine that produces 100 units of output per year is approximately 0.1379.