Assume that a firm owns a machine and on 1 January each year has the choice of selling it, at its current market value, leasing it out to another company for annual rent of £1250 (paid at the end of the year), or operating it for another 12 months. It cannot sell or lease out the machine at any other time during the year and it can invest any capital it might have at an interest rate of 10 per cent.
At the start of year 1 the value of the machine is £5000
At the start of year 2 the value of the machine is £4000
At the start of year 3 the value of the machine is £3000
At the start of year 4 the value of the machine is £ 1000
At the start of year 5 the value of the machine is £500
At the start of year 6 the value of the machine is £300
What is the opportunity cost to the firm of using the machine in (a) year 1, (b) year 2, (c), year 3, (d) year 4 and (e) year 5?