# [OPE-L:4353] Re: Problems in Vol. III

Paul Cockshot (wpc@cs.strath.ac.uk)
Tue, 11 Mar 1997 05:25:19 -0800 (PST)

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I am not sure that your calculations of the rate
of return for the second capitalist are valid. He would
have deposited his depreciatiation account at interest,
and would thus end up with somewhat more.

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> From: Allin Cottrell &lt;cottrell@wfu.edu>
> To: Multiple recipients of list &lt;ope-l@anthrax.ecst.csuchico.edu>
> Subject: [OPE-L:4343] Re: Problems in Vol. III
> Date: 11 March 1997 04:19
>
> > > Allin suggests (OPE 4337) another way of coming at this. My
> > > question to you, Allin, is "What is the rate of return for
> > > CAPITAL 2?"
>
> Please disregard my last question, which was not properly
> thought out.
>
> I make the IRR to be .10 in both cases. Cap1 has a present cost
> of \$1000, followed by a \$100 profit each year, while Cap2 has
> a present cost of \$2000 followed by \$200 profit each year for
> ten years, at which point its machine must be replaced. Make
> the comparison over the ten years.
>
> For Cap1, the IRR solves
>
> 1000 = sum(t = 1 to 9)[100/(1 + r)^t] + 1100/[(1 + r)^10]
>
> At the end of year 10 the capitalist has \$1100 in hand after
> meeting his wage-bill -- his year-10 profit plus the funds to
> purchase another year's materials if he chooses. r = .10
>
> For Cap2, the IRR solves
>
> 2000 = sum(t = 1 to 9)[200/(1 + r)^t] + 2200/[(1 + r)^10]
>
> At the end of year 10 the capitalist has \$2200 in hand after
> meeting his wage-bill -- his year-10 profit of \$200, as stipulated,
> plus the funds to purchase another year's materials, plus the
> funds to replace his machine, which have been set aside as
> depreciation allowance over the ten years. r = .10
>
> Allin.
>