[OPE-L:3018] Re: Straight and Moral

Duncan K Foley (dkf2@columbia.edu)
Sat, 14 Sep 1996 08:42:32 -0700 (PDT)

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On Sat, 14 Sep 1996, John Ernst wrote:
(among other things)
> Let's say that a capitalist buys a machine
> that costs $800, C, to produce 1000 units of
> the commodity, Q. To produce with that machine,
> he must invest $100 in raw and auxiliary
> materials, c, and $100 in variable capital,
> v. If the machine is predicted to
> last 10 periods, then in each period he
> withdraws $80, y, from the output
> should he choose to depreciate the
> machine via straight line depreciation.
> This means that his invested capital
> decreases by that amount, again y,
> after production in each period. If
> the rate of profit is assumed
> constant, say, 15%, this means that the
> amount of profit he anticipates over the
> life of the machine decreases by 150f $80 or
> $12 each period.

This actually isn't the standard method of calculating the rate of profit
in this type of situation. The more common method would be to regard the
machine as an investment involving the outlay of $800 in the initial
period, and returning the cash flow over the ten periods of its useful
existence. You have to specify the price of output and then you can find
the profit: the cash flow would be the sum of the depreciation ($80 per
period in your example) and the profit (unspecified in your example). The
rate of return that would equate the discounted present value of the cash
flow to the initial outlay would be the relevant rate of profit on the
machine (which might depend quite a lot on what you assume about the path
of the price of the output).