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ECO204_2008_Test_2_solutions

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Unformatted text preview: prior permission (b) (5 points) Use the answer in part (a) to compute the annual depreciation for Colgate's capital. Answer: Observe how the Handle Mold and Packaging machines have a depreciation time of 5 years while the Tufter has depreciation time of 15 years. Thus: For the first 5 years, the annual depreciation is = $33,333.33 + $60,000 + $30,000 = $123,333.33 For the next 10 years, the annual depreciation is = $33,333 For any year after, the annual depreciation is nil. (c) (5 points) What is the annual opportunity cost of Colgate's capital? Answer: Since the machines can only be used for Colgate products and cannot be used by other companies, there is no opportunity for the machines to be used elsewhere. Thus, the opportunity cost is zero. 9 ECO 204, 2008-2009, Test 2 Solutions This test is copyright material and may not be used for commercial purposes without prior permission (d) (5 points) Use your answers in parts (a), (b) and (c) to calculate Colgate's price of capital PK in Table 2 below: Answer: Colgate owns its capital. Thus it's PK is the...
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