ajaz_eco_204_2012_2013_chapter_12_Long_Run_CMP

The salvage value is estimated to be 20m and the

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Unformatted text preview: _____________________________ Example: A company buys capital for $100m with a useful life of 4 years. The salvage value is estimated to be $20m and the company wants to use the straight line depreciation method. The opportunity cost rate of return is estimated to be always 10% of the value of capital in the beginning of the period. Then: () () () ( ){ () } () () () () { ( } ( ) ) This yields (check these numbers using the equations above) 18 ECO 204 Chapter 12: a Firm’s Cost Minimization Problem (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Time 0 1 2 3 4 Period Period 1 Period 3 Value at time Depreciation over period 20 Period 2 20 20 Period 4 20 Opportunity cost rate of return at time 0.1 0.1 0.1 0.1 0.1 Price of Owned Capital at time ( ( ( ( ( ) ) ) ) ) () () __________________________________________________________________________________________________ Example: A company buys capital for $100m with a useful life of 4 years. The salvage value is estimated t...
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