Final answer:
The formula for the user cost of capital (Rg) is the opportunity cost of investing financial capital. It reflects the rate of return on other available financial investment opportunities and includes a risk premium. The user cost of capital represents the price that users of capital pay for using it.
Step-by-step explanation:
The formula for the user cost of capital (Rg) is the opportunity cost of investing financial capital. It reflects the rate of return on other available financial investment opportunities and includes a risk premium. In simple terms, the user cost of capital represents the price that users of capital pay for using it.
For example, if the interest rate is 9% and the firm can capture a 5% return to society, the firm would invest as if its effective rate of return is 4%. This means that the user cost of capital for the firm would be equivalent to the price it pays for using the capital, which in this case would be $183 million.