This question re-examines Patrick’s decision (Example 2.5, Chapter 2, BOF) to purchase a ride- on lawn mower. Patrick wants to calculate the annual cost to himself of owning the ride-on lawn mower (this is called the user-cost or user-cost of capital).
He has the following information:
Initial purchase price of lawn mower = $5,000
Nominal interest rate = 6% per annum (Patrick has to borrow the $5,000) Physical rate of depreciation on a lawn mower = 10% per annum Expected sale price of lawn mower at end-of-year = $4,800
(i) Calculate in $s the cost to Patrick of owning the lawn mower for a year. (Hint: You will get a slightly different answer depending on how you treat depreciation. Either way is acceptable)
My answer is 800 (ie. the 10% depreciation + the nominal interest expense on loan)
is this correct?
He has the following information:
Initial purchase price of lawn mower = $5,000
Nominal interest rate = 6% per annum (Patrick has to borrow the $5,000) Physical rate of depreciation on a lawn mower = 10% per annum Expected sale price of lawn mower at end-of-year = $4,800
(i) Calculate in $s the cost to Patrick of owning the lawn mower for a year. (Hint: You will get a slightly different answer depending on how you treat depreciation. Either way is acceptable)
My answer is 800 (ie. the 10% depreciation + the nominal interest expense on loan)
is this correct?