Question

Suppose a company owns a fancy 3D printer which cost $1500 to buy. The printer depreciates $200 per year. (a) If the interest rate is 3 percent, what is the implicit rental price of the printer per year? (b) Does your answer to part (a) depend on whether the company used its own money to buy the printer, or if it took out a loan? Why? Suppose a newer edition of the 3D printer comes out for $2000. Because better technology is used, there is less depreciation; it only depreciates by $150 a year. (c) Calculate the implicit rental price for the new edition of the printer. Which edition of the printer - old or new - has a larger implicit rental price? (d) Suppose the interest rate was instead 5 percent, rather than 3 percent. Which edition of the printer - old or new - has a larger implicit rental price? Compare your answer with part (c), and comment on any difference.

Answer 1

Answer:

a) Implicit Rental Price:

Normal annual cost = $200

3% of $1,500           =      45

Implicit rental price = $245

b) The answer to part (a) does not depend on whether the company used its own money to buy the printer or if it took out a loan, provided that the cost of the loan remains within the 3% accepted rate.  The reason for my answer is that the calculation of the implicit rental price is an economic measurement that tries to capture the opportunity cost of a project and not just the actual cost.

c) Implicit Rental Price:

Normal annual cost = $150

3% of $2,000          =     60

Implicit rental price = $210

The old edition of the printer has a larger implicit rental price.

d) Interest rate = 5%

Old edition: Implicit Rental Price:

Normal annual cost = $200

5% of $1,500           =      75

Implicit rental price = $275

New Edition:

Normal annual cost =  $150

5% of $2,000          =    100

Implicit rental price = $250

The old edition of the printer still has a higher implicit rental price of $270 compared to the new edition's $250, with a difference of $20.

Explanation:

Determining the implicit rental price for the 3D printer, one is forced to consider the lost interest that the investment in the printer would occasion.  By this, the use of the implicit rental price ensures that the only cost of a project is not the direct costs, but also includes some opportunity costs.  Opportunity costs are costs incurred from the revenue lost because another option is chosen.